Kiss the old tax rules goodbye after you file your 2017 tax return. Tax laws were majorly overhauled for 2018, which will likely affect you. In fact, it is the most significant change in the U.S. tax code in 30 years. Out of 1,000-plus pages of the new tax law, below is a list of highlights.
REDUCED INDIVIDUAL TAX RATES
The new law retains seven tax brackets with lowered rates across the board. New rates range from 10 percent to 37 percent as of 2018, which revert back to the old rates in 2026.
PERSONAL EXEMPTIONS AND STANDARD DEDUCTION – TAKE THE BAD WITH THE GOOD
As expected, personal exemptions are eliminated, but only through 2025. On the other hand, the standard deduction nearly doubles to $12,000 for single individuals, $24,000 for married taxpayers filing jointly and $18,000 for head of household taxpayers. The head of household filing status managed to survive – a win for single taxpayers supporting children and other dependents.
EXPANDED CHILD TAX CREDIT
The child tax credit doubles to $2,000 for tax years 2018 through 2025. This credit is available for each qualifying child under age 17. Modified income limits make the credit available to more families and a $500 credit is available for a nonchild dependent such as a parent.
FEWER ITEMIZED DEDUCTIONS
This is arguably one of the most painful sections of the new tax law for Californians. State and local taxes are capped at a meager $10,000, which includes property taxes deducted as itemized deductions. Other changes include the complete elimination of itemized deductions previously subject to the 2 percent AGI limitation including unreimbursed employee expenses, union dues and investment fees to name a few.
MORTGAGE INTEREST CAP
Homeowners can deduct mortgage interest on acquisition indebtedness up to $750,000 for their personal residence and second home. For mortgages taken out before Dec. 15, 2017, the limit is $1,000,000. Interest on home equity loans is no longer deductible.
POPULAR ELIMINATED DEDUCTIONS
Alimony payments are no longer deductible for divorce decrees dated after Dec. 31, 2018. Starting in 2018, moving deductions are scrapped, except for the military. Casualty and theft loss deductions were also chopped.
PASS-THROUGH INCOME PERK
Pass-through income gets a big tax break. This includes income earned by sole proprietorships, LLCs, partnerships and S-corporations. Taxpayers can deduct 20 percent of their pass-through income, subject to a few limitations. If you are a doctor, lawyer or accountant, don’t get too excited. There are phaseout income limits that apply to “professional services.”
CORPORATE REDUCED RATE
The top corporate tax rate has been cut from 35 percent to a flat rate of 21 percent.
IMMEDIATE EXPENSING OF BUSINESS ASSETS
Businesses can immediately expense the cost of new depreciable assets (other than structures) purchased after Sept. 27, 2017, through 2022 rather than depreciating them over a longer period of time. This generous expensing will be phased out by 2026.
ALTERNATIVE MINIMUM TAX (AMT) REVISION
Unfortunately, the wretched alternative minimum tax for individuals made it through tax reform. On the plus side, exemptions have been raised so fewer taxpayers are subject to this additional tax.
ESTATE TAX CHANGES
The estate tax survived tax reform. However, it is effectively eliminated for most people thanks to the increased exclusion from $5.6 million to $11.2 million per individual. A married couple can shelter $22.4 million from the estate tax. Good news: The step-up in basis at death is still allowed.
THE BOTTOM LINE
The new tax laws are a mixed bag of give-and-take for individuals. Talk to a tax professional now to plan for the implications of these new 2018 rules. ￼
Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at firstname.lastname@example.org or 661-324-4971. The views expressed in this column are her own.