New Tax Rates: The bill keeps the graduated taxing structure for individuals but by and large it lowers rates across the board. The top rate of 37% (current rate of 39.6%) kicks in for singles with taxable income in excess of $500,000 and MFJ with taxable income in excess of $600,000. As most of us do not have to worry about paying tax at that rate the other graduated rates are 10%, 12%, 22%, 24%, 32% and 35%. This replaces the current rate structure of 10%, 15%, 25%, 28%, 33% and 35%.
The corporate rates were also cut. The highest corporate rate is now 21% down from 35%. Flow through income (from “S” corporations, LLC, partnerships, sole proprietorships) will also have a rate lower than the individual rates they are currently paying.
Standard Deduction: The standard deduction beginning in 2018 increases to $12,000 for singles and $24,000 for MFJ. This replaces the current amounts of $6,350 for singles and $12,700 for MFJ. With the increased amount many more of you will begin taking the standard deduction as opposed to itemizing beginning next year.
Itemized Deductions: Most of the itemized deductions many of you are familiar with (medical expenses; sales, state income and property taxes; mortgage interest; charitable contributions) remain deductible with a few modifications. Total taxes are only deductible up to $10,000; mortgage interest only on new mortgages up to $750,000; home equity loan interest is no longer deductible are a couple of the changes. Also unreimbursed business expenses and other miscellaneous itemized deduction subject to the 2% floor are no longer deductible.
If you expect to itemize in 2017 but not in 2018 based on the increased standard deduction make your property tax payments and any charitable contributions you were planning to make prior to December 31, 2017.
Exemptions: Beginning in 2018 you are no longer able to deduct a personal exemption for you, your spouse or children. Currently this amount is $4,050 each.
The withholding rules are expected to change in early 2018 to reflect the fact that personal exemptions are no longer deductible. This means your federal withholding from your paycheck will likely change and could so significantly. If you have questions once the new withholding tables go into effect please let me know.
Child Tax Credit: The act increased the amount of the child tax credit to $2,000 per qualifying child (dependent under 17 years old) with $1,400 of this being refundable. Under current law this amount is $1,000 per dependent child. The phase out of this credit begins for singles with adjusted gross income of $200,000 and MFJ with adjusted gross income of $400,000.
Capital Gains Tax Rate: The system for taxing long term capital gains and qualified dividends did not change. This rate remains at 15% for most taxpayers.
Sale of Principal Residence: The act did not change the current rules regarding the exclusion of gain for the sale of your qualified principal residence. As long as you meet certain requirements (mainly it being your principal residence for two of the last five years) and your gain from the sale does not exceed $250,000 for singles and $500,000 for MFJ you will not owe any tax from the sale.
Health Care Penalty: The act reduces to zero the amount of the individual mandate penalty imposed on taxpayers who do not obtain health insurance with minimum essential coverage. This is only the penalty. If you have health care through the exchange and received a credit resulting in a reduced monthly premium based on your prior year income, should your current year income increase you will likely still be responsible for paying the credit back.
Education Provisions: The act modifies Section 529 plans to allow them to distribute no more than $10,000 in expenses for tuition incurred during the tax year at an elementary or secondary school. This limitation applies on a per-student basis, rather than on a per-account basis. Under current law Section 529 plans could only be used for post-secondary education. In addition the American Opportunity Credit, Lifetime Learning Credit and Tuition and Fees Deduction all remain unchanged.
Student Loan Interest: The student loan interest deduction remains the same. You can deduct up to $2,500 of student loan interest paid during the year. This deduction is subject to income limitations.
As always if you have any questions please let me know. I am looking forward to talking with you as we enter tax preparation time for your 2017 taxes. At that time I will be happy to help you understand how your 2018 taxes will be affected by this new act.
J. Alan Hayes