By now you have been inundated with media hype about the biggest tax reform law in over 30 years. When you file your individual 2018 tax returns — about a year from now — your tax return will look very different. And because most changes don’t happen until then, we have some time to learn about the changes and plan for next year.
In general, the tax reform law isn’t really much “reform” as it is rearranging the chairs. Some areas of the new law will be favorable to individual and business taxpayers, some areas will be unfavorable.
Overall, however, the GOOD NEWS is that MOST taxpayers (individuals and businesses), will likely see some tax relief under the new law.
Here are a few of the biggest changes that may affect you.
Tax rate changes
Both individual and corporate rates have changed. The maximum individual rate is reduced to 37% and the corporate rate is now a flat 21%. The rate change could benefit you — or in some cases cause your tax liability to go up.
Standard deduction increases
However, there are no more personal exemption deductions allowed. So this may help you — or hurt you.
Increased Child Tax Credit and new Dependent Credit
The credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non-child dependent can now receive a new credit of $500. But you will have no exemption credit or deduction for yourself, your spouse, or your dependents.
The phaseout thresholds for these credits are drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). The credits are fully phased out for married taxpayers filing a joint return when their adjusted gross income reaches $440,000 ($240,000 for all others). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
Beginning with the 2018 tax year, you will no longer be able to deduct:
- State income tax and property taxes above $10,000 per year in total;
- Moving expenses (with an exception for certain military);
- Employee business expenses such as mileage, travel, entertainment, home office expenses, union dues, tax preparation fees, and investment fees, among others;
- Mortgage interest beyond interest on $750,000 of acquisition debt, if you purchase a new home; and
- Mortgage interest paid on equity debt (this is no longer deductible for any taxpayers).
Some new benefits for individuals
These new benefits include:
- The medical expense AGI threshold will temporarily drop to 7.5% of AGI for 2017 and 2018;
- The AMT threshold is increased, so fewer middle-income taxpayers will be subject to AMT;
- The estate tax exclusion has nearly doubled, to $10 million (adjusted for inflation); and
- The annual gift tax exclusion remains the same ($14,000 for 2017 and $15,000 for 2018), but the maximum rate on gifts is 35%.
Small business benefit
Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity. The rules are incredibly complex but there is a lot of planning that Sousa & Weber could do to maximize this deduction for you.
These are some of the big common changes – since they are not simple, we suggest that you meet with your tax advisors to go over the changes that apply to your situation and to talk about how to maximize your tax benefit. We’d be happy to walk you through it at Sousa & Weber! Contact us to set up a consultation.