The New Tax Law – 13 Key Changes for 2018
On December 22, 2017, President Donald Trump signed the New Tax Law to take effect on January 1, 2018.
Following are the key changes:
1. Tax Brackets & Rates – Maintains 7 individual tax rate brackets – 10%, 12%, 22%, 24%, 32%, 35% and 37 % – which will start in tax year 2018 and expire by the end of 2025 (like bush-era tax cuts). The top rate is a 2.6% fall from the current top rate of 39.6% and raises income thresholds to over $500,000/$600,000 (single/married).
2. Standard Deduction and Personal Exemption – Standard deductions doubled to $24,000/$18,000/$12,000 (married/head of household/single filers). Elimination of personal exemption until 2025.
3. Child Tax Credit (CTC) – The CTC is key provision for selling tax reform to middle to lower income families. Senate provisions to double to $2,000 per child from $1,000 were adopted. A $500 credit was also added for non-child dependents. However, will have income and deductibility restrictions whereby it would only be refundable up to $1,400 and start to phase out at $200,000/$400,000 in income. The higher CTC would expire by 2025.
4. Eliminated Itemized Credits and Deductions – Senate provision adopted to limit state and local property taxes (SALT) deductions to $10,000 in on tax payer’s federal IRS returns. Final bill also has several provisions that eliminate a slew of tax breaks such as deductions for moving expenses and tax preparation costs.
5. Reduced Itemized Credits and Deductions – Mortgage interest deduction for existing homeowners will remain in place ($1 Million). For new homes, taxpayers will only be able to deduct interest on up to $750,000 in mortgage debt.
6. Kept Itemized Credits and Deductions – Retains tax breaks for charitable donations, child and dependent care credit, education relief, and Medical & long-term care expenses deductions (lowers threshold back to 7.5% for next 2 years, before going back to 10% from 2020).
7. Estate and Death Tax – Doubles the exemption for the estate tax per Senate provision, but estate (or death) tax remains in place.
8. Alternative Minimum Tax (AMT) – Senate provision generally adopted by eliminating the corporate alternative minimum tax, but keeps individual AMT. The individual AMT income exemption threshold will be raised to reduce the number of tax payers subject to this tax.
9. Corporate Taxes – Cuts corporate tax rate to 21% from the current 35% rate. Change would take effect from 2018.
10. Small Business Taxes – 20% business income deduction for the first $157,50/$315,000 (single/married) in income earned by pass-through businesses. Disallowed for specific service trades or businesses (accounting, health, law, consulting, athletics, financial services, brokerage services).
11. Global & International Taxes – Eliminates double taxation of foreign income and moves US to a territorial system in line with other western countries. Also has a higher one-time repatriation tax rate than Senate and House bills where companies would pay 15.5% on cash assets and 8% on non-cash assets.
12. Capital Gains – No changes to current CGT structure. Exclude controversial first in first out stock sales change to appease investment groups who strongly opposed this rule.
13. Obamacare Penalty – Incorporates Senate provision for individual mandate repeal beginning in 2019. Would still be in effect during 2018 in the final bill. Saves $330 billion, but CBO estimates 13 million Americans would be uninsured in 10 years as a result.
These changes as well as a bit of realignment will allow people to take full advantage of the new tax law and its simplifying of the income tax filing process. And it doesn’t hurt to bring in some professional help when needed. Complex tax situations will benefit greatly from tax legal expertise and understanding the full ramifications of changes for 2018 before they fully apply.
Email me at DanYoung@b2bcfo.com to schedule a complimentary business consultation. Our Tax Specialist colleagues are fully aware of the changes that will take place on the tax reform.
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