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As you get ready to file your 2018 personal tax return, many of the provisions of The Tax Cuts and Jobs Act (TCJA) that was enacted late in 2017 will come into play. Tax reform is here! You’ve most likely read in the press about the SALT deduction limitations. You’ve also probably heard bits and pieces about AMT reform. However, you’re puzzled about what you’ve likely heard about people getting to reduce their income with a new 20% deduction because they’re self-employed! If you were concerned enough, you’ve worked with us to get a better feel about the legislation and asked us to prepare a tax projection for 2018, while exploring various planning options. In this article, I highlight some of the provisions of the TCJA and encourage you to work with your tax professionals to better understand the legislation and to take advantage of the planning opportunities that exist for many of our readers.
Changes in tax rates
You may have heard in the news that the goal of tax reform was to reduce the number of tax rates from the existing seven rates to three. While that was discussed, the bill that was signed into law still has seven rates, but they are now generally lower with the highest rate being reduced from 39.6% to 37%. The tax rates applicable to net capital gains and qualified dividends did not change.
Increased standard deduction
The new standard deductions are:
Although you may have historically had itemized deductions exceeding these amounts, other changes to itemized deductions may affect whether you are above the standard deduction in a given year. We anticipate that some of you may itemize every other year, which was mostly unheard of previously.
Elimination of personal and dependent exemptions
In the past, taxpayers received an exemption for themselves, their spouse and each of the eligible dependents that they claimed on their tax return. The TCJA eliminated these exemptions through Dec. 31, 2025. Yes, they’re taking away deductions from us, but hold tight, as they’re lowering tax rates and enhancing certain tax credits.
Alternative Minimum Tax (AMT)
Despite what you may have heard, AMT is alive and kicking. Many of you will be pleasantly surprised that your AMT exposure is greatly reduced or possibly eliminated all-together. The income thresholds have been increased and some modifications adjusted. Great news for many of our clients and friends.
Child and family tax credit
The TCJA increased the child credit for children under age 17 to $2,000 and also introduced a new $500 credit for taxpayer’s dependents who are not their qualifying children. In addition, the phase-out limits for these credits have increased to $400,000 for joint filers ($200,000 for others), so that more individuals will be able to take advantage of this credit. This will be a big plus for many families.
Changes to itemized deductions
The overall phase-out of itemized deductions has been repealed. The itemized deduction for state and local taxes is limited to a total of $10,000 ($5,000 for those using the filing status of married filing separately). For example, if you paid $15,000 in state income taxes and $6,000 in real estate taxes on your home ($21,000 in total), you would not be able to deduct the $11,000 that exceeds the deduction threshold. This is the Salt provision that’s gotten a lot of press. Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million). Loans in existence on December 14, 2017 are grandfathered (balance up to $1 million still allowed).Interest on home equity indebtedness (such as a home equity line of credit) is no longer deductible unless the debt is really acquisition indebtedness (used for home improvement). Consider whether the indebtedness was used for business or investment purposes to determine if an interest deduction may be available in a different category. Cash donations to public charities are now deductible up to 60% of adjusted gross income.Donations to colleges and universities for ticket or seat rights at sporting events are no longer deductible.Miscellaneous itemized deductions, such as investment management fees, tax preparation fees, unreimbursed employee business expenses and safe deposit box rental fees are no longer deductible. This is a major loss for many of our readers. With some planning, you may be able to get some tax savings despite the law change. Medical expenses are deductible by the amount the expenses exceed 7.5% of adjusted gross income for 2018 (limit changes to 10% starting in 2019).
These changes (except as noted) to itemized deductions are in effect from Jan. 1, 2018 through Dec. 31, 2025.
New deduction for qualified business income (Code Sec. 199(a))
A new deduction, effective for tax years 2018 through 2025, was introduced in the TCJA that allows individuals a deduction of 20% of qualified business income from a partnership, S corporation or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.
This deduction will reduce taxable income, but not adjusted gross income, and is available regardless of whether you itemize your deductions. This is a great opportunity for many of you. Unfortunately, it’s likely the most complicated provision of TCJA. The IRS has issued some regulations and guidance in recent weeks, but there are still a number of unknowns and uncertainties that have to be dealt with. There are many limitations and restrictions to this provision. If you have not done so already, we advise that you schedule a personal consultation with us to fully understand the impact on your situation.
New corporate tax rate
The prior-law graduated corporate tax rates have been consolidated into one 21% flat rate. The separate rate for personal service corporations of 35% has been repealed. These changes are effective for tax years beginning after Dec. 31, 2017. If you own a “C Corp”, you’ll want to at least know that the rates have changed and you may need to explore options for future years as to how your business in structured and conducted. If you’re thinking about going into a new business venture, especially with the new 199(a) provisions, the “pass through” entity selection may be more appealing. We’re here to help you and to work with your attorney and other advisors on what structure works for you.
Sec. 529 plans
Sec. 529 plans have been a widely-used tool to help taxpayers save money for college, presuming they distribute that money for qualified higher education costs. Depending on your Sec. 529 plan, you may be eligible for a state tax deduction for contributions to the plan. The TCJA expanded the opportunities available for education tax planning by permitting $10,000 per year to be distributed from Sec. 529 plans to pay for private elementary and secondary tuition. Contact us to learn how these new rules may help you pay for private school tuition for your family.
The TCJA repealed the deduction for business “entertainment”. This includes expenditures such as taking clients to sporting events, shows, and paying for season tickets for various entertainment events. Since these items are no longer deductible, it is very important to have your company’s internal accounting set up appropriately. We can help you identify these expenses and treat them correctly on your tax return. The rules for “meals” expenses are substantially intact from prior years, providing a 50% deduction in most cases.
Under the prior law, individuals who paid alimony to an ex-spouse received a deduction for the alimony paid, while the individuals receiving the alimony treated those payments as income. Tax reform has eliminated the deduction for alimony paid and the recognition of income for alimony received effective for divorce decrees executed after Dec. 31, 2018. We highly recommend that if you are in the midst of divorce proceedings, please have a conversation with us and your divorce attorney to fully understand the financial impacts that this could have.
Like-kind exchange restrictions
The new tax law restricts a like-kind exchange to real property (e.g., buildings and land). Under the prior law, you could utilize a like-kind exchange for tangible personal property and intangible property used in a business or held for investment. For years, business owners have been trading cars, machinery and other business assets and have not had to report the gain or loss on that trade-in. Things are now different, so I encourage you to be very thoughtful when doing your next deal, as with some planning ahead of time, you may get a better outcome tax-wise.
While the TCJA is effective now, there are still many uncertainties. Additional technical guidance and regulations are necessary to provide more clarity on some of the changes. To further complicate things, New York State and some other states are “decoupling” from certain portions of TCJA. Our Tax Team has been reading, researching, and attending webinars and conferences, all with the goal of providing high-quality tax and consulting services to our clientele. Thanks for reading today and for being a client or friend of Marvin and Company, P.C.