This column is sponsored by Market Street Partners, PLLC
Thanks to new legislation, the 2018 tax landscape may look very different for you. Here are 5 things to keep in mind.
President Donald Trump signed the bill formerly known as The Tax Cuts and Jobs Act into law on Dec. 22, 2017. This bill, which has been commonly referred to as “tax reform” in the media, represents the largest overhaul to the Internal Revenue Code since The Tax Reform Act of 1986, and it contains numerous provisions that will impact individual taxpayers starting with their tax returns for the 2018 calendar year — returns they’ll be filing in 2019.
You could spend weeks reading through the numerous tomes that have been written addressing the various aspects and provisions relating to tax reform, but here are five considerations to keep in mind while planning and preparing for your upcoming tax filings.
1. Individual income tax rates have been lowered for most taxpayers.
Despite original discussions centering on reducing the number of tax brackets, the new law retains the same number of tax brackets as under the old law. The new law also reduces the top tax rate from 39.6% to 37% while changing the tax rates applicable to different amounts of taxable income. These updated tax brackets are applicable for tax years starting in 2018, but are set to expire on Dec. 31, 2025. The table below compares the tax brackets under the new law and the old law for married taxpayers filing jointly.
2. Personal exemptions have been eliminated and the standard deductions have been increased.
Under the old law, individuals were eligible to claim a personal exemption of $4,050 for themselves, which could be used to reduce their taxable income. They could also claim exemptions of $4,050 for their spouse if filing a joint return, plus an additional $4,050 for any qualifying dependent children. These personal exemptions have been eliminated as part of tax reform.
The standard deduction has been retained and has also been increased as part of tax reform. Under the old law, individuals filing as single could claim a standard deduction of $6,500 and married couples filing jointly could claim a standard deduction of $13,000 which could be used to reduce their taxable income. These amounts have increased to $12,000 and $24,000 respectively as part of tax reform. The increased standard deduction is set to revert back to the original amounts on Dec. 31, 2025.
Under the new law, a married couple filing jointly with two dependent children would be eligible for a standard deduction of $24,000. Under the old law they would be eligible for a standard deduction of $13,000 as well as $16,200 of personal exemptions, which is made up of four separate exemptions at $4,050 each, for a total reduction in income of $29,200. What does that mean now? In this scenario, assuming there are no other changes, the couple’s taxable income would increase by $5,200 in 2018 compared to 2017.
3. The child tax credit has been increased and is available to more taxpayers than before.
To help alleviate the increase in taxable income some families might experience based on the elimination of the personal exemptions (above), Congress has doubled the amount of the child tax credit from $1,000 under the old law to $2,000 starting in 2018. There were no changes to the rules about which children are able to be claimed for the credit. To qualify, the child must be under the age of 17 for the year in which the credit applies. They must also be your biological or adopted child, stepchild, a foster child living with you, or child, sibling, or step-sibling of any of these people. The child must also have not provided more than half of their own support, must have lived with you for more than half of the year, and must be a U.S. citizen, U.S. national, or U.S. resident alien.
The adjusted gross income levels at which this credit starts to phase-out is increased from $110,000 for married couples filing jointly under the old law to $400,000 under the new law and is increased from $75,000 to $200,000 for single filers. These changes to the child tax credit are set to expire and revert back to the old rules on Dec. 31, 2025.
4. Miscellaneous itemized deductions have been eliminated.
Under the old law, individuals were able to claim certain miscellaneous expenses as itemized deductions to the extent that the total of all the miscellaneous itemized deductions being claimed exceeded 2% of their adjusted gross income. These expenses were also added back to an individual’s taxable income for the purposes of computing their Alternative Minimum Tax (AMT). Expenses previously eligible to be deducted as miscellaneous itemized deductions included tax preparation fees, investment management fees, moving expenses, safe deposit box fees, and unreimbursed employee expenses. Individuals with large amounts of unreimbursed employee expenses such as salespeople that frequently travel and dine with potential clients or customers will want to discuss possible solutions to the elimination of this deduction with their employer. The elimination of the deduction for miscellaneous itemized deductions is set to expire and revert back to the old rules on Dec. 31, 2025.
5. The itemized deduction for state and local taxes is now limited.
Starting in 2018, state and local taxes not paid in the course of operating a trade or business are limited to $10,000 per year. The $10,000 limit includes state and local income taxes, state and local property taxes, and state and local sales taxes. Previously there were no limits on the deductibility of these amounts. Taxes paid in the course of operating a trade or business, including the rental of real property are not subject to the $10,000 limit. The $10,000 limit on deducting state and local taxes is set to expire on Dec. 31, 2025.
Although the bill has already been signed into law, tax reform is an ever-changing issue as the Internal Revenue Service is still in the process of drafting regulations related to the new provisions in order to help taxpayers and tax professionals interpret and apply the new law to their situation.
If you need an experienced CPA firm to help guide you through the changing tax landscape, Market Street Partners would love to hear from you.
Market Street Partners, PLLC is a Chattanooga-based CPA firm offering a wide range of accounting, tax, and advisory services.
