There was a sweeping overhaul of US tax legislation late last year. Most of these changes don’t affect the 2017 tax year; however, virtually all of them affect 2018 and beyond. As is the case with everything at Deductions.TAX we endeavor to provide an executive summary, and then more detail for those that want to learn more. Consider this entire note an executive summary of the changes with individual articles on each change to be posted elsewhere on the site.
Here are the changes you need to be aware of:
Standard Deduction – It have gone up, big time – almost double. $24,000 for couples and $12,000 for individuals ($18,000 for heads of household).
Personal Exemptions – gone – both for individuals and their dependents. This is the tradeoff for the Standard Deduction Increase, but net-net most families (who do not itemize their deductions) will come out ahead.
Home Mortgage Deduction – If you purchased your home prior to December 15, 2017 then you can deduct interest up to $1m on primary mortgage debt (including refinancing of that debt). If you purchased your home on or after December 15th your maximum interest deduction is based on an amount of $750k. You may no longer deduct interest on a home equity loan from 2018 onward.
529 College Savings Plans – up to $10,000 per student can now be used to pay for elementary and secondary education.
Alternative Minimum Tax Thresholds are higher: $109,400 for joint returns and $70,300 for single and household heads. The “exemption phaseout” starts at a higher level. $1m for couples and $500k for everyone else.
State and Local Taxes – Maximum deduction of $10,000 on residential property + state income or sales tax. $10,000 is the total allowed across all three categories combined.
Charitable Contribution – AGI limitation on cash donations is increased from 50% to 60%.
Childcare Tax Credit goes from $1000 to $2000 for dependents under the age of 17. The income phaseout thresholds are much higher. (AGI $400k for couples and $200k everyone else).
Estate Tax – the lifetime gift has double to $11,000,000. The 40% tax remains in effect for amounts in excess of $11m.
Kiddie Tax – unearned income of children will be taxed as ordinary income and capital gains rates will be applicable to trusts and estates, not their parents marginal tax rate.
Medical Expense Deduction – The AGI threshold has been lowered from 10% to 7.5%.
Obamacare Financial Penalty – the requirement for people to have health insurance or pay a fine is repealed from January 1, 2019 onward. Note the date is 2019, not 2018 so it is still in effect this year.
Upper Income Phaseout of Itemized Deductions is eliminated. This is big for high income earners.
Deductions Eliminated: job related moving expenses (except for military); alimony paid for post 2018 divorces; personal casualty losses unless in a Federal Disaster Area. All other miscellaneous expenses are subject to 2% AGI threshold (i.e. brokerage/IRA fees, hobby expenses, employee business expenses, tax return preparation, etc.).
Business Asset Depreciation – some assets will receive a “100% bonus depreciation” if the are put into use between September 28th 2017 until 2022 – phasing out 20% per year after. Expensing business assets has doubled to $1m.
Business Interest Expense Deduction – is now capped at 30% of adjusted taxable income. Companies with less than $25m of revenue, real estate companies and specific regulated utilities are exempt.
Business Loss Write-Off on Individual Returns – is now capped at $500k for couples and $250k (everyone else). Excess can be carried forward.
C-Corporations pay a flat 21% rate, down from 35% previously.
Employer Paid Family or Medical Leave receives a 12.5% credit of the amount of wages paid during the period of leave – but only for 2018 and 2019. This goes away for the 2020 tax year and beyond.
Passthroughs (Most LLCs, Sole Proprietors, S Corporations, Partnerships, REIT shareholders and owners of Publicly Traded Partnerships) will receive a 20% deduction. There are a number of limits and restrictions to prevent gaming of the law, and certain high income professional services fields will face phaseouts at $315k (married) and $157k (everyone else) respectively.
Some Business Entertainment and Employee Fringe Benefits are reduced or eliminated (think employer-paid mass transit passes, etc.)
US Multinationals that have avoid paying taxes on overseas asset will face a one-time tax on previously untaxed accumulations overseas – 15% on foreign cash and liquid assets and 8% on reinvested profits.
Farmers and other special groups will receive more easing.
Certain Previously Exempt groups such as Private Colleges with large endowments will pay a 1.4% excise tax on net investment income.
The tax bill is hundreds of pages long and this is a very high level summary to give you an idea of what has changed, but it is not all inclusive and will necessarily not be detailed so that we could get through the list quickly. We will cover the fine details in other articles on Deductions.TAX throughout this year.
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