We hope you had a Merry
Christmas and are enjoying spending time with family and friends this Holiday
season.
As you already know,
Congress has passed new tax legislation that will go into effect for 2018. This is the largest tax bill passed in 30
years and it will take some time to digest all of it. That being said, we want to provide you with
what we feel are the highlights and the items that are most likely important to
you.
Adjusted individual tax brackets and lower rates
The new tax code changes both the individual
and joint filing tax brackets for 2018.
These changes are temporary and are set to expire as of December 31,
2025. Congress would need to act prior
to this date to make these changes permanent.
*Chart does not account for the Medicare
surtax on high earners. Source: House of Representatives, Tax Cuts and Jobs
Act, December 16, 2017
New higher standard deduction
The new bill combines the personal exemption
and standard deduction into a single higher standard deduction, which will be
indexed to inflation. The child tax credit increases and there is a new
dependent tax credit. The higher standard deduction for people age 65 and older
still exists. These new provisions will expire after December 31, 2025, and the
rules would return to current law.
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Rules for 2017
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New 2018 rules
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Standard deduction
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$6,350 per individual
$12,700 married couple filing jointly (MFJ)
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$12,000 per individual
$24,000 married couple filing jointly
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Child tax credit
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$1,000
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$2,000
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Senior citizens
(over age 65)
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Addition $1,500 (individuals)
Additional $2,500 (Couple MFJ, both spouses over age 65)
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No change
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Dependent tax credit
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None
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$500 per non-child dependent
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The new higher standard deduction means it
will likely make sense for fewer people to itemize deductions. Therefore, charitable gifts, medical
expenses, home mortgage interest, and other itemized deductions, will all face
a higher threshold before they become useful.
In addition, the proposal directly changes or
limits a large number of deductions and credits.
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Deductions and credits
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Rules for 2017
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New 2018 rules
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Mortgage interest
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$1 million primary, second homes
and some home equity debt
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Limited to $750,000 of mortgage
debt. This provision would be applicable for taxable years after December 31,
2017 and beginning before January 1, 2026, when the limit would return to
$1,000,000.
Eliminates deduction for interest on new home equity loans until taxable years
beginning after December 31, 2025.
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State and local tax deduction
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Deductible
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Capped at $10,000
for sales and state and local property taxes or sales and state and local
income taxes
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Medical expense deduction
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Expenses greater than 10% of AGI
are deductible
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Expenses greater than 7.5% of AGI
could be deducted for the next 2 years only.
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Adoption expense tax credit
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Expenses up to $13,570 qualify
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No change
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Temporary increase in federal estate tax exemption
The legislation roughly doubles the federal
estate tax exemption to $11 million per person ($22 million per couple). That
limit would be indexed to inflation, but would expire and revert back to
current law after 2025.
Changes to the alternative minimum tax (AMT)
AMT was designed to prevent high-income
individuals from avoiding income tax by piling up deductions. It is essentially
a parallel method for calculating your income tax liability, but removing some
itemized deductions.
The tax reform legislation makes changes
designed to limit the impact of the tax. The plan will raise the minimum income
level at which the AMT could apply, from $50,600 to $70,300 for individuals and
from $78,750 to $109,400 for couples married filing jointly.
New corporate tax rate and pass-through tax rate
Corporate tax rates will be cut to 21%
beginning in 2018. That tax cut is not scheduled to expire. As a result, you have likely already seen
some U.S. companies offer bonuses and announce pay raises for 2018.
Pass-through businesses, businesses structured
as sole proprietorships, partnerships, and S-corporations, will be taxed at
individual tax rates, but will be able to deduct 20% of income.
529 plans become more flexible
The tax bill allows 529 college savings plan
assets to be used for education expenses for grades K—12 as well as college and
post graduate study.
This is just a quick summary of the highlights
of the changes coming for 2018. Should
you have any questions or would like to discuss how these new laws may impact
you personally, please feel free to give us a call to discuss.
Happy New Year!
Sugarloaf Wealth Management