2018 Ushers in Big Changes in Taxes

2017 Tax Cuts and Jobs Act: Planning Required For Leveraging Benefits of Tax Code Changes

At this point, everyone is aware of the 2017 Tax Cuts and Jobs Act. On December 22, 2017, Congress passed sweeping tax code changes intended to create jobs and spur economic growth. 2018 tax year changes welcome a host of both opportunities and limitations requiring businesses and individuals to revisit their tax strategies. While many of the new law’s provisions are designed to sunset in 2026, the next eight tax seasons represent a unique window of opportunity if planning techniques are employed wisely.

Provisions of The Tax Changes and Jobs Act impact corporate and individuals tax rates, pass-through businesses, estate and gift taxes, business expenses, executive compensation, pensions and benefits as well as international taxation.

What does it mean to you?

Individual tax rates have been reduced for nearly everyone. Brackets have been lowered, from 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, respectively, to the new rates, 10%, 12%, 22%, 24%, 32%, 35%, and 37% beginning with the 2018 tax year. The shift will yield little or no change for some, although some may benefit from increases in available credits. Other taxpayers, particularly middle to higher income individuals, will see reductions in rates, tempered in some respects by limitations in deductions.

The major outcome, as promised by Congress, is a dramatic decrease in Corporate tax rates. Corporate rates have shrunk from a top rate of 35% to a flat rate of 21%. Perhaps the most significant reduction in corporate taxation since the Reagan era, the change may warrant business owners to visit their tax professional to examine a variety of tax-related business decisions. As the law impacts pass-through entities, it may be time to question if your current business entity selection is optimal from a tax perspective?

Filing Status Standard Deduction
Married Individuals filing joint returns and surviving spouses $24,000
Head of Household $18,000
Unmarried individuals (other than surviving spouses and Head of Household $12,000
Married individuals filing separate returns $12,000

For individuals with children who qualify, the Child Tax Credit will rise in the 2018 tax year, from $1000 to $2000.

Deductibility Changes
Under the new law, deductibility at the Federal level for taxes paid to state and local jurisdictions has been capped at $10,000. This limitation impacts the total amount of property tax, state income taxes, and other local taxes such as auto tabs that an individual may deduct.

Deductibility of mortgage interest has also been restricted. The million dollar limit under the old law has been reduced to $750,000.
On the positive side, the basic standard deduction has been doubled for filers beginning in 2018. Depending on your filing status, that deduction now ranges from $12,000 to $24,000.

Alternative Minimum Tax
Alternative minimum tax exemption amounts have been increased temporarily (sun setting in 2026) to $109,400 for those who are married and filing jointly and surviving spouses. For single and Head of Household filers, the exemption is now $70,300, while married taxpayers filing separately, the exemption is $54,700. Many individuals who were impacted by Alternative Minimum Tax in the past will find that they are now under the new higher exemption amount – at least until 2026.

Other Changes
Other significant changes include the elimination of the ACA-era penalty for taxpayers who do not have a healthcare policy for all or part of the tax year, as well a change in the way unearned income is treated for children. Under the old rule, a child’s investment income, in excess of $2,100, was taxed at the parent’s marginal tax rate. Under the new rule, all of a child’s investment income is subject to tax, and at the rates applicable to estates and trusts.

As with every major tax law, changes in philosophy shift tax liabilities. There are always opportunities and there are always pitfalls. For both individuals and business owners, the potential for unforeseen issues to impact your tax liabilities at the end of 2018 is likely enough to warrant a review of your situation with your tax professional. An hour or two of planning may yield significant tax savings in 2018 and for years to come.