What the Tax Reform Act Means for You
Revised: 12/28/2017
Congress has passed a tax reform act that will
take effect in 2018, ushering in some of the
most significant tax changes in three decades.
There are a lot of changes in the new act, which
was signed into law on Dec. 22, 2017.
You can use this memo as a high-level overview
of some of the most significant items in the new
act. Because major tax reform like this happens
so seldom, it may be worthwhile for you to
schedule a tax-planning consultation early in
the year to ensure you reap the most tax savings
possible during 2018.
Key changes for individuals:
Here are some of the key items in the tax reform
act that affect individuals:
· Reduces
income tax brackets: The
act retains seven brackets, but at reduced
rates, with the highest tax bracket dropping to
37 percent from 39.6 percent. The individual
income brackets are also expanded to expose more
income to lower rates (see charts below).
· Doubles
standard deductions: The
standard deduction nearly doubles to $12,000 for
single filers and $24,000 for married filing
jointly. To help cover the cost, personal
exemptions and most additional standard
deductions are suspended.
· Limits
itemized deductions: Many
itemized deductions are no longer available, or
are now limited. Here are some of the major
examples:
o Caps
state and local tax deductions: State
and local tax deductions are limited to $10,000
total for all property, income and sales taxes.
o Caps
mortgage interest deductions: For
new acquisition indebtedness, mortgage
interest will be deductible on indebtedness of
no more than $750,000. Existing mortgages are
unaffected by the new cap as the new limits go
into place for acquisition indebtedness after
Dec. 14, 2017. The act also suspends the
deductibility of interest on home equity debt.
o Limit
of theft and casualty losses: Deductions
are now available only for federally declared
disaster areas.
o No
more 2 percent miscellaneous deductions: Most
miscellaneous deductions subject to the 2
percent of adjusted gross income threshold are
now gone.
Tip: If you’re used to itemizing your return,
that may change in coming years as the doubled
standard deduction and reduced deductions make
itemizing less attractive. To the extent you
can, make any remaining itemizable expenditures
before the end of 2017.
· Cuts
some above-the-line deductions: Moving
expense deductions get eliminated except for
active-duty military personnel, along with
alimony deductions beginning in 2019.
· Weakens
the alternative minimum tax (AMT): The
act retains the alternative minimum tax but
changes the exemption to $109,400 for joint
filers and increases the phaseout threshold to
$1 million. The changes mean the AMT will affect
far fewer people than before.
· Bumps
up child tax credit, adds family tax credit: The
child tax credit increases to $2,000 from
$1,000, with $1,400 of it being refundable even
if no tax is owed. The phaseout threshold
increases sharply to $400,000 from $110,000 for
joint filers, making it available to more
taxpayers. Also, dependents ineligible for the
child tax credit can qualify for a new
$500-per-person family tax credit.
· Expands
use of 529 education savings plans: Qualified
distributions from 529 education savings plans,
which are not subject to tax, now include
tuition payments for students in K-12 private
schools.
· Doubles
estate tax exemption: Estate
taxes will apply to even fewer people, with the
exemption doubled to $11.2 million ($22.4
million for married couples).
· Kiddie
tax: Effective
2018, the “kiddie tax” on children’s unearned
income will use the estates and trusts tax rate
structure, meaning it will be taxed anywhere
from 10 percent to 37 percent.
What stays the same for individuals:
· Itemized
charitable deductions: Remain
largely the same.
· Itemized
medical expense deductions: Remain
largely the same. The deduction threshold drops
back to 7.5 percent of adjusted gross income for
2017 and 2018, but reverts to 10 percent in the
following years.
· Some
above-the-line deductions: Remain
the same, including $250 of educator expenses
and $2,500 of qualified student loan interest.
· Gift
tax deduction: Remains
and increases to $15,000 from $14,000 for 2018.
Farewell to the healthcare individual mandate
penalty
One of the changes in the tax act is the
suspension of the individual mandate penalty in
the Affordable Care Act (also known as “Obamacare”).
The penalty is set to zero starting in 2019, but
remains in place for 2018 and prior years.
Tip: Retain your Form 1095s, which will provide
evidence of your healthcare coverage. Without
it, you may have to pay the individual mandate
penalty, which is the higher of $695 or 2.5
percent of income. Beginning in 2019, this
penalty is set to zero.
NOTICE: The
IRS recently granted employers and health
care providers a 30-day filing extension for
Forms 1095-B and 1095-C, to March 2, 2018.
The IRS clarified that taxpayers are not
required to wait until receipt of these
forms to file their taxes.
New 2018 tax bracket structures for individuals
Single taxpayer
Taxable income over |
But not over |
Is taxed at |
$0 |
$9,525 |
10% |
$9,525 |
$38,700 |
12% |
$38,700 |
$82,500 |
22% |
$82,500 |
$157,500 |
24% |
$157,500 |
$200,000 |
32% |
$200,000 |
$500,000 |
35% |
$500,000 |
|
37% |
Head of household
Taxable income over |
But not over |
Is taxed at |
$0 |
$13,600 |
10% |
$13,600 |
$51,800 |
12% |
$51,800 |
$82,500 |
22% |
$82,500 |
$157,500 |
24% |
$157,500 |
$200,000 |
32% |
$200,000 |
$500,000 |
35% |
$500,000 |
|
37% |
Married filing jointly
Taxable income over |
But not over |
Is taxed at |
$0 |
$19,050 |
10% |
$19,050 |
$77,400 |
12% |
$77,400 |
$165,000 |
22% |
$165,000 |
$315,000 |
24% |
$315,000 |
$400,000 |
32% |
$400,000 |
$600,000 |
35% |
$600,000 |
|
37% |
Married filing separately
Taxable income over |
But not over |
Is taxed at |
$0 |
$9,525 |
10% |
$9,525 |
$38,700 |
12% |
$38,700 |
$82,500 |
22% |
$82,500 |
$157,500 |
24% |
$157,500 |
$200,000 |
32% |
$200,000 |
$300,000 |
35% |
$300,000 |
|
37% |
Estates and trusts
Taxable income over |
But not over |
Is taxed at |
$0 |
$2,550 |
10% |
$2,550 |
$9,150 |
24% |
$9,150 |
$12,500 |
35% |
$12,500 |
|
37% |
Key changes for small businesses:
Here are some of these key items in the tax
reform act that affect businesses:
· Cuts
the corporate tax rate: Corporate
tax gets cut and simplified to a flat 21 percent
rate, changed from a multi-bracket structure
with a 35 percent top rate.
· Reduces
pass-through taxes: Most
owners of pass-through entities such as S
corporations, partnerships and sole
proprietorships will see their income tax
lowered with a new 20 percent income reduction
calculation.
· Beefs
up capital expensing: Through
2022, short-lived capital investments in such
items as machinery and equipment may be fully
expensed as soon as they are placed in service,
using bonus depreciation. This now also applies
to used items instead of only new ones; they
just need to be placed in service for the first
time in your business. After 2022, allowable
bonus depreciation is then lowered incrementally
over the next four years.
· Strengthens
Section 179 deduction: Section
179 deduction limits get raised to enable
expensing of up to $1 million, and the phaseout
threshold increases to $2.5 million. Section 179
may now also be used on expenses related to
improvements to nonresidential real estate.
· Nixes
the corporate alternative minimum tax (AMT): The
20 percent corporate AMT applied to businesses
goes away entirely.
· Expands
use of cash-method accounting:
Businesses with less than $25 million in gross
receipts over the last three years may adopt the
cash method of accounting.
· Reforms
international taxation: Treatment
of international income moves to the territorial
system standard, in which foreign investments
are generally only taxed in the place in which
they operate. The new laws allow tax deductions
for certain foreign-sourced dividends, reduced
tax rates for foreign intangible income and
reduced tax rates for repatriation of deferred
foreign income.
· Repeals
business entertainment deduction: Businesses
will no longer be able to deduct 50 percent of
the cost of entertainment, amusement or
recreation directly related to their trade or
business. The 50 percent deduction for
business-related meals remains in place,
however.
· Modifies
several business credits: Several
business credits are maintained but modified,
including the orphan drug credit, the
rehabilitation credit, the employer credit for
paid family or medical leave and the research
and experimentation credit.
· Boosts
luxury automobile depreciation: Luxury
automobiles placed in service after 2017 will
have allowable depreciation of $10,000 for the
first year, $16,000 the second, $9,600 the third
and $5,760 for subsequent years.
This brief summary of the tax reform act is
provided for your information. Any major
financial decisions or tax-planning activities
in light of this new legislation should be
considered with the advice of a tax
professional. Call if you have questions
regarding your particular situation. Feel free
to share this memo with those you think may
benefit from it.
©MC_4617-TC |