2018 ushered in a major new tax act that will impact all taxpayers. We haven’t seen this major degree of tax reform since 1986.
One interesting point about the new tax bill is, in order to comply with budgetary constraints, it contains a sunset or expiration date for many of its provisions. In other words, many provisions expire post 2025 and revert back to the old rules. Meeting the budget constraints allowed the Senate to pass the bill under reconciliation procedures, meaning that only a simple majority vote was required instead of the 60-vote threshold that typically applies. This indicates there was weak (if any) bi-partisan support for the new tax act. Consequently, we can expect ongoing uncertainty and revisions to our tax rules as control over Congress and the White House swing back and forth in the years ahead.
Key Changes for Individuals
- Net Income Tax Rates and Brackets. In general, the tax rates for each bracket of income decreased by a couple of percentage points. For example, married filing joint rates are:
- Standard Deduction Increased. The standard deduction (claimed in lieu of itemized deductions) increased to $24,000 for married individuals and $12,000 for single individuals.
- Personal Exemption Deduction. The deduction for personal exemptions (self, spouse and dependents) has been eliminated.
- Long-Term Capital Gains and Qualified Dividends. The new law retains the preferential tax rates for capital gains and qualified dividends which are taxed at the lower of the taxpayer’s ordinary tax rate or 15%. Capital gains and qualified dividends are taxed at 20% when taxable income (joint return) is equal to or greater than $479,000.
Planning Comment. Timing the sale of your practice may matter. With regular practice income factored into the equation, a sale late in the year versus early in the year may increase the tax cost by 5% (20% capital gain rate versus 15%).
- Child Tax Credit Increased. The child tax credit has been increased to $2,000 per child and the income level at which the credit phases out is increased to $450,000 of adjusted gross income for married taxpayers. The net effect of this change is more taxpayers, even high income taxpayers, will benefit from the enhanced child tax credit.
- State and Local Tax Deduction Limited. The new law limits the aggregate amount of the itemized deduction for sales tax, real estate taxes and personal property taxes (RTA excise tax) to $10,000. This will likely impact many taxpayers in our local area given the increase in property values and real estate taxes in recent years.
- Interest Paid on Mortgage and Home Equity Indebtedness. The new law limits the deduction for mortgage interest to underlying acquisition indebtedness of up to $750,000 (married taxpayers). Acquisition indebtedness is debt incurred to purchase, remodel/substantially improve or construct a primary residence. Acquisition debt can include home equity debt used for these purposes. The old limit of acquisition indebtedness of up to $1.1 million is grandfathered for loans incurred before December 15, 2017. Interest on home equity indebtedness (excluding HELOC debt used to purchase, improve or build a home) is no longer deductible.
- No Charitable Deduction for College Athletic Seating Rights. No charitable deduction is allowed for any payment to a higher education institution in exchange for the right to purchase tickets or seating at an athletic event.
- Alimony Deduction by Payor/Inclusion by Payee. For any divorce or separation agreement executed after December 31, 2018 or modified after that date, alimony and separate maintenance payments are no longer deductible by the payor spouse and are not included in the income of the payee spouse.
- Miscellaneous Itemized Deductions. Miscellaneous itemized deductions for such items as unreimbursed employee expenses, personal tax preparation and planning fees and investment management fees are no longer deductible.
- Expanded Use of 529 Education Account Funds. Qualified education expenses now include tuition at an elementary or secondary public, private or religious school.
- Alternative Minimum Tax. The AltMin Tax is a tax that negates the benefit of certain tax deductions and imposes minimum taxes on high income taxpayers that have tax preferred income (qualified dividends and capital gains). The new law increases the exemption amounts and phase-out thresholds. The net effect is taxpayers will pay less AltMin tax under the new law.
The following example demonstrates the impact of the new law. Amounts are rounded.
- Married filing joint
- Two dependent children
- Phased out of new Qualified Business Income Deduction
This article highlights some of the key provision of the 2017 Tax Cuts and Jobs Act. This information is intended to be general in nature. Readers should consult with their professional tax advisor to assess their specific tax situation and determine the suitability of various tax planning strategies.
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