The recently passed Tax Cut and Jobs Act was based on three over-arching themes: simplification, tax reduction and job creation. The simplification of the tax code is more readily apparent within the individual provisions as opposed to the business provisions. However, the Act reduces tax rates for both individuals and C corporations. Congress feel that lower tax rates and a simpler and more transparent tax code will create domestic jobs.
As we work through the 2017 filing season we have begun meeting with clients to also discuss the 2018 changes, the effect of the law and various tax planning opportunities. Below we summarize the tax law changes that we feel may impact our clients.
1) The 2018 Tax Brackets – Marginal Rates & Filing Status
2) The Standard Deduction for each filing status has almost doubled. All personal exemption deductions for one’s self, spouse and dependents has been eliminated.
3) Itemized deductions that have been modified include:
- A cap on the state and local taxes (SALT) of $10,000, previously unlimited;
- Mortgage Interest – The previous cap on mortgage debt for a first and second home was $1,000,000 of acquisition debt and $100,000 of home equity debt. The Act reduces the debt cap to $750,000 including home equity loans. In terms of the home equity piece, interest is now deductible only if the loan is for home acquisition or remodel;
- Medical Expenses for 2017 and 2018 may be deductible if the expenses exceed 7.5% of your adjusted gross income – down from 10%. The threshold is again 10% beginning January 1, 2019;
- Charitable contributions may be deductible up to 60% of your income – up from 50%;
- Unreimbursed employee expenses, such as mileage, are no longer deductible;
- Itemized deductions could previously be limited depending on your income and filing status. This limitation has been removed through the end of 2025. As a result – it is anticipated that over 80% of all Americans will utilize the Standard Deduction and not itemize deductions in future years.
4) The tax penalty for failing to be insured under the Affordable Care Act has been repealed beginning January 1, 2019.
5) A child tax credit is available for each child dependent under the age of 17 subject to income phase outs. The credit has been increased from $1,000 to $2,000 and the income thresholds have been significantly increased. This is the most significant change for families who have qualifying dependents.
1) In 2017, the highest corporate tax rate is 35%. Under the current tax law, beginning in 2018, the highest tax rate will be 21%. The alternative minimum tax “AMT” for corporations has been repealed.
2) Businesses organized as sole proprietors, limited liability companies, partnerships and S Corporation may be able to take a 20% deduction on their net business income that is reported on their personal tax returns subject to income thresholds. There are many clarifications being sought on the applicability and manner of the calculations. Once the IRS offers clarification, we will better understand how the change will affect our clients.
1) The top estate tax rate is 40% and previously applied to estates valued over approximately $5,500,000 for individuals and nearly $11,000,000 for married couples. The new tax law approximately doubles the amount of exempt level to $11,200,000 for individuals and $22,400,000 couples.
Although the tax code has been “simplified”, there still exists many nuances, phase-outs, and thresholds that require careful consideration and discussion. Please reach out to us to discuss the details of the various law changes, their applicability and the planning opportunities which may now exists.