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Blog

New Tax Law Changes


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.


Rules for 2017

New 2018 rules

Standard deduction

$6,350 per individual
$12,700 married couple filing jointly (MFJ)

$12,000 per individual
$24,000 married couple filing jointly

Child tax credit

$1,000

$2,000

Senior citizens
(over age 65)

Addition $1,500 (individuals)
Additional $2,500 (Couple MFJ, both spouses over age 65)

No change

Dependent tax credit

None

$500 per non-child dependent


 


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.


Deductions and credits

Rules for 2017

New 2018 rules

Mortgage interest

$1 million primary, second homes and some home equity debt

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.

State and local tax deduction

Deductible

Capped at $10,000 for sales and state and local property taxes or sales and state and local income taxes

Medical expense deduction

Expenses greater than 10% of AGI are deductible

Expenses greater than 7.5% of AGI could be deducted for the next 2 years only.

Adoption expense tax credit

Expenses up to $13,570 qualify

No change


 


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

 


 




 


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