- December 21, 2017
- / Danielle Dryden, Esq.
- / IRS,tax,tax reform
If you’ve walked out your front door at any point this week, you know that taxes have been quite a topic of conversation across the country. There have been several changes suggested, taken back, voted upon, revised, changed again, discussed some more, until the final draft was voted upon yesterday in the House. With all the back and forth, your head might be spinning. I don’t blame you. In an effort to clarify what just happened, I’ve outlined several of the major changes for you.
Personal Income Tax Rates: There are still seven tax brackets but they have been revised to 10, 12, 22, 24, 32, 35, and 37 percent. Under the new law, the top tax bracket drops from 39.6 to 37 percent but kicks in at $600,000 per married couple instead of the current $1 million. It should be noted that the reductions in personal income tax rates ends at midnight December 31, 2025 unless this legislation is renewed for an extended period.
Standard Deduction: The current deduction is $6350 for individuals and $12,700 for married couples filing jointly. The new law nearly doubles this amount to $12,000 for individual filers and $24,000 for couples, also expiring at the end of 2025.
Personal Exemption: The new law eliminates the personal exemption in its entirety.
State and Local Taxes: Currently, you can reduce your taxable income by claiming a deduction for state and local taxes. These might include property taxes, sales taxes, state income taxes, or city taxes. These taxes are still allowed under the new law, but are capped at $10,000. No matter how much you pay in these types of taxes, you will only be allowed a $10,000 deduction. Those that live in areas with high local tax rates and own property will be hardest hit by this particular change.
Tax Credits: The per-child tax credit is doubling from $1000 to $2000 for families making up to $400,000 per year. Up to $1400 of that credit is available to lower and middle-income families as a refund. This credit is also set to expire at the end of 2025.
Home Mortgage Interest: The current law limits the deduction of mortgage interest paid to the first $1 million of your home loan. The new law reduces this limit to $750,000 and is only applicable to new loans for a first or second home.
Medical Expenses: The new law allows a deduction for medical expenses not covered by insurance that exceed 7.5 percent of adjusted gross income for 2018 and 2019. In 2020, deductions will be allowed for expenses in excess of 10 percent.
Individual Insurance Mandate: The penalty for not purchasing and maintaining health insurance was repealed. There will no longer be a penalty assessed.
Job expenses and Miscellaneous Deductions: Deductions that exceed 2 percent of your adjusted gross income will not be allowed under the new law. This includes deductions for Unreimbursed Employee Expenses and tax preparation expenses. These expenses are for tools and supplies not paid for by your employer, dues and subscriptions, and job search expenses. These expenses also include unreimbursed travel and mileage as well as the home office deduction. So, those of you paid wages by your employer but work from your home will be affected by this change. I should point out that these are expenses claimed on your Schedule A and do not apply to those claimed on a Schedule C if you are a business owner. Schedule C deductions are not subjected to this change.
Alternative Minimum Tax: The purpose of AMT is to ensure that higher-earning people are paying some tax. For individuals, the new law increases the amount that can be exempted from the AMT. The tax was repealed for corporations.
Inheritance Tax: The current law requires an estate to pay taxes on the value of assets transferred to heirs above $5.5 million for individuals and $11 million for couples. The new law doubles these amounts and repeals the tax entirely in 2025.
Corporate Taxes: The current tax rate of 35 percent is substantially reduced to 21 percent starting on January 1, 2018. Unlike the personal income tax rates and deductions, this reduction has no expiration.
Pass-through Businesses: Most businesses “pass through” their income to individuals, who then pay personal income tax on those earnings instead of corporate tax. The new bill allows those people to deduct 20 percent of the first $315,000 of earnings. If you’re a business owner and you’re not sure what this means, a pass-through business includes entities like sole proprietorships, partnerships, and S-Corporations.
Businesses: The new law allows businesses to immediately write off the full cost of any equipment they purchase.
Multinational Corporations: Tax advantages for companies moving overseas have been repealed.
So, what do you do? There are a few things you can do now (read, RIGHT NOW), before the end of the year to help reduce your liability for next year.
If you’re a homeowner, the first thing you should do is prepay your property taxes. That way, they are an expense in 2017 and wouldn’t be subject to the cap on state and local taxes that starts for the 2018 tax year. You might be thinking of prepaying your income tax as well. Unfortunately, Congress thought of this already and made sure that 2018 state and local INCOME taxes paid in 2017 will be treated as paid in 2018.
Make additional charitable contributions to reduce your income now. Here’s an example. If you made $160,000 in 2017 and make a $1000 donation to charity, there is a $280 break on your taxes for that donation. Next year, the same income and the same donation will only allow you a break of $220.
If you can, maximize your 401k contributions. This will reduce your taxable income, thus your balance due when you file in April.
If you’re self-employed, accelerate your spending. Have you been thinking that your business needs a new (insert thing here)? Buy it before the end of the year. This will help reduce your tax due this year when the rates are a bit higher when next year the rate drops and the deduction is greater.
Are you getting a year end bonus? See if you can defer it until after January 1. The name of the game in the next 10 days is to keep your taxable income as low as possible so that you can take advantage of the lower tax rate in 2018.
Pay your various expenses now. Do you need uniforms for 2018? Do you need new work boots? Do you pay a professional to prepare your taxes and keep your books nice and neat through the year? (I hope so!) If you can, buy your uniforms now. Call your CPA or bookkeeper and ask to prepay 2018 services. NONE of these things are deductible in 2018 so take advantage of the deduction now.
Hopefully this information is helpful. If you need clarification or have other questions, find me on Facebook or Instagram or email me at firstname.lastname@example.org.
Merry Christmas and Happy New Year! See you in 2018!