As we find ourselves only a few months away from ending the first year under the new tax law, our clients and friends of the firm would be well served to revisit the law's changes and implications. We strongly recommend proactive conversations with your CPA to discuss the potential effects to your individual tax situation.
As a guide, we have summarized below the changes that could have an impact on your 2018 tax liability.
Individual Tax Bracket Reduction: All but two Marginal Rates were reduced and Income Thresholds increased.
Personal Exemption Eliminated: The $4,050 exemption per individual and dependents was eliminated. For a married couple filing jointly and supporting two children, that is a loss of $16,200 in income reduction (or stated another way, an increase in taxable income of $16,200).
Standard Deduction Increased: Standard Deduction will be increased to $12,000 for individual filers (from $6,350 in 2017) and $24,000 for joint filers (from $12,700). For those 65 and older or blind, an additional $1,300 is allowed ($2,600 for joint filers). A large number of taxpayers are expected to use the increased Standard Deduction instead of itemizing deductions.
Itemized Deductions: Those who continue to itemize will see changes:
- Cap on State and Local Income Tax and Property Tax Deductions: In a change that has become a highly charged, political issue, taxpayers who itemized deductions are allowed to deduct only $10,000 for State/Local Income Tax and Property Tax (for both Individual and Joint Filers). As we noted in an August article, politicians in high tax states have adamantly opposed this change as their higher-than-average state and local income taxes and property taxes will no longer be subsidized.
- Mortgage Interest Deduction: The new law places a cap on the deductibility of mortgage interest on the first $750,000 of principal debt on any Mortgage taken out after December 15, 2017. Existing mortgage holders can continue deducting interest on the first $1,000,000
- Home Equity Line of Credit Interest: The new law suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan. For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not.
- Cash Donations: Threshold for deductibility of Charitable Cash Donations increased from 50% of AGI to 60%.
- Medical Expense: Threshold for deductibility of Medical Expenses temporarily decreased to 7.5% of AGI in 2018 (and retroactive for the 2017 tax year). Increases back to 10% after 2018.
- Investment Advisory Fees/Other Miscellaneous Deductions: All miscellaneous deductions subject to the 2% AGI floor are eliminated. Some notable expenses in this category include tax preparation fees, unreimbursed employee expenses and investment advisory fees.
Pease Limitation Eliminated: The Pease Limitation on Itemized Deductions has been eliminated. Pease reduced Itemized Deductions by 3% as Adjusted Gross Income reached certain levels ($261,500 for individuals, $313,800 for joint filers).
Alternative Minimum Tax (AMT): The new law creates significant increases to income thresholds for AMT, reducing the number of taxpayers impacted. The two changes:
- AMT Exemption Amount: For those whose income is subject to AMT, the amount of income exempt from AMT increases from $55,400 (individuals) and $86,200 (joint) to $70,300 and $109,400, respectively.
- AMT Exemption Phase-out Amount: Currently, the AMT Exemption is phased out as AMT income exceeds $123,100 (individuals) and $160,900 (joint filers). The new law increases those levels to $500,000 and $1 million, respectively.
Pass-Through Income: With the exception of “specified service” businesses, the new tax law allows for a 20% reduction in the amount of reported Pass-Through Income (which is then claimed as income on the individual’s tax return). The exempt business sectors include health care, law, accounting and financial services (to name a few). Additional restrictions may affect the application of the 20% reduction.
Trust and Estate Income Taxes: Brackets remain compressed with only $12,500 of income needed to reach the highest rate of 37% though the new law did result in a reduction in the number of brackets from 5 to 4 and lower Marginal Rates.
Estate and Gift Tax Exemptions: The Unified Estate and Gift Tax exemption amounts increased to $11.2 million ($22.4 million for married couples) from the 2017 amounts of $5.6 million ($10.2 million for married couples).
Roth IRA Re-characterizations: The new law disallows the Re-characterization (or “undoing”) of a regular IRA that was converted to a Roth IRA, starting with filings for the 2018 tax year.
529 Plans: Distributions from 529 Plans can now be used tax-free for public, private and religious elementary and secondary school qualified expenses (up to $10,000 per student per year). This also applies to home schooling expenses.
We look forward to discussing in further detail any questions you may have, and as always, are available to communicate directly with our client’s tax professionals.