Everyone is talking about the new tax law and how it will affect us. While we are still learning the fine details, here is a quick run-down of what we feel will affect most of our clients. Keep in mind, there are also different business rules that have come about. If you would like more information, please contact our office.
Tax Brackets – Prior to January 1, 2018, the tax code included seven tax brackets, ranging from 10% to 39.6%. The new code also includes seven brackets, but they range from 10% to 37%. View tax brackets here.
Standard Deduction – The standard deduction is a deduction that all taxpayers are eligible for. It is the minimum deduction allowed for those with itemized deductions that total less than the standard deduction. For 2017, the standard deduction for a married couple, filing a joint return, is $12,700. For the tax year beginning January 1, 2018, the standard deduction for this couple will now be $24,000.
Personal Exemption – Prior to January 1, 2018, taxpayers received an income exemption for each dependent claimed on their tax return. The exemption amount for 2017 is $4,050. Beginning in 2018, personal exemptions will no longer be allowed.
State, Local and Property Tax Deductions – Prior to January 1, 2018, the taxes we pay to the state and local governments are itemized deductions, reported on a Schedule A. Going forward, those deductions are still allowed, but are limited to a combined $10,000. Keep in mind, taxes paid in the normal course of business, such as farm property taxes, rental property taxes and business building property taxes, are still fully deductible to that business.
Home Mortgage Interest – Another common itemized deduction we see is the mortgage interest deduction. While this deduction will still be allowed, it is limited to $750,000 (married filing joint) of acquisition indebtedness. Home equity interest will no longer be allowed.
Charitable Contributions – Charitable contributions will still be allowed as they always have. However, with the increased standard deduction, it is less likely to have an effect.
Miscellaneous Deductions – Lesser known itemized deductions are included in the “Miscellaneous” section of a Schedule A and are subject to 2% of a taxpayer’s adjusted gross income. These deductions include unreimbursed employee expenses, tax preparation expenses, safe deposit box rental, hobby expenses, investment fees and legal expenses. Under the new law, these deductions will be suspended.
Medical Expense – Taxpayers under 65 are currently subject to 10% of their adjusted gross income before medical expenses are deductible. For 2017 and 2018, this percentage will be adjusted to 7.5% of adjusted gross income.
Alimony – Beginning with divorce decrees signed after December 31, 2017, alimony payments will not be deductible for the payer, nor will they be taxable to the recipient.
Moving Expenses – All moving expense deductions will be suspended for 2018-2025.
Child Tax Credit – Tax years prior to January 1, 2018 allowed a child tax credit of $1,000 per child under age 17. For tax years 2018 through 2025, this credit is increased to $2,000 per child. In addition, a new dependent credit will be available. The dependent tax credit is nonrefundable, but allows a $500 credit for each dependent not eligible for the child tax credit.
Exclusion of Gain on a Personal Residence – A very popular exclusion for those selling their homes is the exclusion of the gain. Prior to January 1, 2018, to be eligible for this exclusion, the taxpayer was only required to reside in the property for two of the prior five years. Beginning with sales after January 1, 2018, taxpayers would have to reside in the property as their primary residence for five of the prior eight years.
Individual Shared Responsibility Payment – Beginning in 2019, taxpayers without minimal essential coverage health insurance will no longer be liable for the shared responsibility payment.
Estate Tax - The estate tax exemption amount has been raised from $5.6 million to $11.2 million, effective January 1, 2018 through 2025. With portability elected, this exemption could be as high as $22.4 million.
Education and 529 Plans - 529 college savings plans are now eligible to pay for private elementary and secondary education, in addition to post-secondary education, up to $10,000 per year.
Like-Kind Exchanges - Many farmers and small business take advantage of Section 1031 exchanges on equipment. Beginning January 1, 2018, these exchanges have been limited to real property only.
How will the new tax law affect me?