There are a lot of changes that come with the 2018 tax reform. Here is a quick look at the major changes. For an in-depth look please visit The Motley Fool. Either way, you will need a tenured accountant to ensure you maximize your deductions and are in compliance with all changes. The NTRC team is here to assist with both your individual and business taxes. Reach out today to learn more.
The initial goal was to reduce the number of tax brackets from seven to three, but seven remain. However, they have changed significantly so you must check with your accountant to see if you are in a new tax bracket. One of the primary goals was to eliminate what is referred to as the ‘marriage penalty’ which would often bump two equally earning individuals up to a higher tax bracket when transitioning from filing individually to joint. It’s not perfect but the impact has lessened.
Capital Gains Taxes
The capital gains tax system is for the most part the same but there are a few changes:
- Short-term capital gains are taxed as ordinary income, but since the tax brackets have changed you will be taxed on capital gains at a new rate.
- The capital gains income thresholds are not aligned with the new tax brackets. Again, this will change the rate at which your capital gains are taxed.
- The 3.8% net investment income tax for high earners remains but will likely be removed if ACA is repealed.
Tax Breaks For Dependents
The personal exemption is going away which will impact families with multiple children. However, the expanded Child Tax Credit will help to make up this difference. It doubles the credit from $1,000 to $2,000 for qualified dependents under the age of 17. The amount of this credit that can be refunded rises to $1,400. Parents can claim a nonrefundable $500 for qualified dependents over the age of 17. The Child and Dependent Care Credit remains in place.
Education Tax Breaks
The Lifetime Learning Credit and Student Loan Interest Deduction are still in place, as well as the exclusion for graduate school tuition waivers. However, the 2018 tax reform expands the use of the 529 college savings plan to include private school and tutoring for grades K-12.
Mortgage interest deductions can now only be taken on mortgage debt of up to $750,000—down from $1 million. This applies to mortgages dated after December 15, 2017. Existing mortgages are grandfathered in. Home equity interest can no longer be deducted, but home equity debt may qualify.
Medical Expense Deductions
Medical expense deductions have been reduced from 10% of AGI to 7.5%. This is retroactive to the 2017 tax year.
State And Local Taxes
The state and local taxes (SALT) deduction is now limited to a total deductible of $10,000. This includes income, sales, and property taxes.
Deductions That Are No Longer
It is essential to understand what expenses you must be tracking, both personally and professionally. When it comes to personal taxes, no more itemizing. Here are just a few other items that are no longer deductible:
- Casualty and theft not attributed to a federally declared disaster
- Unreimbursed employee expenses
- Tax preparation expense
- Moving expenses
- Employer-subsidized parking and commuter reimbursement, with the exception of cyclists
There is no more penalty for not having health insurance.
Pass-Through Business Income
There are some major changes to pass-through business income taxes, which apply to sole proprietorships, LLCs, partnerships, and S corporations. Those who qualify can deduct 20% of their pass-through income. There are thresholds which vary significantly for professional-service business models.
New Alternative Minimum Tax Brackets
The AMT was designed to ensure that high earning couples and individuals pay their fair share of taxes. However, the bracket had not been adequately adjusted for inflation meaning that some middle class earners were paying higher taxes due to this law. The brackets have been changed to accurately adjust inflation.
- Singles are up to $70,300 from $54,300
- Married Filing Joint are up to $109,4000 from $84,5000
- Married Filing Separate are up to $54,700 from $42,250
Estate Tax Exemption
Estate tax exemptions for 2018 have been doubled. The new rates are an $11.18 million lifetime exemption for individuals and $22.4 million for couples. This means few families will be paying estate taxes for the time being.
Corporate Tax Rates
There is a flat C corporation tax rate of 21%. There are guidelines and thresholds but the new rates are simplified.
Territorial Tax System
No more double taxing of U.S. corporations for profits earned abroad. Previously businesses had to pay taxes in the foreign country their business operated in and in the U.S. To offset the loss of taxes on foreign profits, there is a one-time 15.5% repatriation rate on cash and foreign-held assets. Also, an 8% repatriation on liquid assets payable over 8 years.
As overwhelming as the changes listed above maybe they are only a handful of 2018 tax changes. To ensure that you adequately plan, track, prepare, and file your personal and professional taxes—reach out to the team at NTRC Tax and Finance today!