This upcoming tax season is the first year that taxpayers and tax practitioners will work with the changes put in place by the Tax Cuts and Job Act (TCJA) signed into law on December 20, 2017. Significant, far-reaching changes were made that will likely have a substantial impact on all taxpayers and businesses. The Top Ten list below very briefly highlights certain new provisions. This list is not meant to detail all that changes under the new tax law and excludes tax law changes to things like entertainment expenses, alimony, etc. that some taxpayers may deem more important than the changes listed in the Top Ten list below. With those caveats in mind; the Top Ten tax law changes that will impact the upcoming tax season:
10. The Standard Deduction has been increased
- Single and Married Separate: $12,000
- Married-Joint: $24,000
- Head of Household: $18,000
9. Personal and Dependent Exemptions have been eliminated
- Under the new tax law, taxpayers can no longer claim the $4,050 exemption for themselves or any of their dependents.
8. The Child Tax Credit rises
- The value of the Child Tax Credit increases from $1,000 to $2,000.
- There is also a new $500 credit for non-child dependents.
- The income thresholds have been raised to qualify from the credit from $75k/$110k (S/MFJ) to $200k/$400k.
7. The state and local tax deduction is capped at $10,000
- This most commonly includes state income tax, real estate tax, and auto excise tax.
6. The mortgage interest deduction drops
- Individuals who purchase a home in 2018 can only deduct interest up to $750,000 of mortgage debt (previously $1 mil).
- The interest deduction on home equity debt is essentially eliminated.
5. Miscellaneous itemized deductions are no longer deductible
- This includes things like unreimbursed job expenses, union dues, investment advisor fees, tax prep fees, safe deposit box costs, etc.
4. The Alternative Minimum Tax (AMT) is essentially eliminated
- Corp AMT 100% dead, Individual AMT raised thresholds significantly and modified tax law to essentially void the tax.
3. International tax system reform
- Significant changes to bring US more in alignment with how other countries operate and tax international transactions and business.
2. The Qualified Business Income deduction (QBI)
- If you own a service business and make less and $157k/315k you likely qualify for the 20% deduction. Over that threshold, certain service businesses lose the deduction like accountants, attorneys, doctors, etc.
- Non-service businesses have a different calculation which is the lesser of 20% of your QBI or the greater of 50% of your W-2 wages or 25% of your W-2 wages plus 2.5% of you qualified property cost. We are still waiting on more guidance from the IRS for the particulars of this new concept.
1. Tax rates have been lowered. The C corp rate is now 21% and individual tax rates are detailed below.
What does it all mean? Every situation is different, but as a generalization, large corporations are expected to have significant savings because of lower tax rates. Next, are pass-thru entities. The new 20% QBI deduction should lead to substantial savings for S-Corps, LLCs, and sole proprietorships. Although some individual taxpayers are losing some deductions, the overall savings in lower tax rates generally more than offsets this loss of deductions.
Of course, we’ll know what the real impact is after we have all filed our taxes in the next couple of months. If you have any questions or comments please call or email our office.