2018 taxes: what can you expect under our new tax code
The Tax Cuts and Jobs Act (herein TCJA) is the largest tax reform since 1996. The questions started last tax season and continue into this one. Since so many people have reached out, I wanted to go ahead and address what I think are the best and worst parts of the reform
BEST:
Increased standard deduction
What is it? In 2017, the standard deduction was $6,350 for single filers ($12,700 for joint). The TCJA increases this amount to $12,000 for single filers ($24,000 for joint).
What does that mean to you? A lot. Fewer and fewer taxpayers have been able to meet the thresholds for itemization for many years. This reform takes an additional $12,000 of income per married couple and turns it into income exempt from federal income tax. If you are being taxed at 10% the tax savings will be $1,200.
Lower tax rates
What is it? The TCJA not only lowered tax rates, but it also expanded the brackets.
What does it mean to you? You can make more and stay within the same bracket which is now taxed at a lower rate. Married couples can now make up to $77,400 of taxable income (income remaining after the application of the standard deduction) and be taxed at only 12%. In 2017, a married couple with the same amount of taxable income would be taxed at 25%!
Increased Child Tax Credit
What is it? The Child Tax Credit was established in 1997 as a $400 credit for each child under age 17. Over the years it was increased. In 2017, the credit was for $1,000 per child under the age of 17, with an additional credit of $1,000 for certain income thresholds that was refundable. Under our new code, the credit is for $2,000 per child under the age of 17, with up to $1,400 of the credit being refundable!
What does it mean to you? More tax savings! In additional to more savings, the credit doesn’t begin to phase out until you reach an income of $200,000 for single taxpayers or $400,000 for joint filers.
Alternative Minimum Tax changes
What is it?Amt was designed to keep wealthy taxpayers from using loopholes to avoid being taxed on certain sums of money. Since it was not being updated annually for inflation, over time it began to impact more and more of the middle class. It became known as the “absolute maximum tax” by practioners.
What does it mean to you? Luckily, the TCJA has provided temporary relief to many middle class taxpayers by making it so that only taxpayers making over $191,500 (married) AMT income would pay the tax.
Section 199-A Deduction
What is it? Section 199-A was designed to offset the heavy corporate tax cuts in the TCJA. This provision applies to sole proprietors, partners in partnerships, and members of S-corporations and LLCs. 20% of the Qualified Business Income from these forms of business will now be deducted before tax is applied!
What does it mean to you? You aren’t disadvantaged by owning one of these types of businesses. There is no need to revoke your S-election or restructure your business to capitalize on the TCJA. Additionally, if you are already accustomed to paying a high rate on your pass through income, your pockets will be thanking you this filing season!
WORST
Eliminated Personal and Dependent Exemptions
What is it? In 2017, every person included on a return resulted in an additional $4,050 in additional income excluded from taxation. The TCJA eliminated these exemptions entirely.
What does it mean to you? Nothing, if you are married with no dependents. However, a married couple with one child will see an increase of taxable income of $850. For each additional child, $4,050 of previously tax free income will be taxed. For a family with 5 children the result is $17,050 of previously untaxed dollars being included for tax purposes.
Loss of Certain Itemized Deductions
What is it? The TCJA eliminated miscellaneous itemized deductions. Among the largest of these: employee work expenses.
What does it mean to you? If you work in a trade that requires you to spend unreimbursed dollars on travel, meals, union dues, etc. these amounts are no longer a tax write off for you. For many taxpayers this will make the difference between being able to itemize or not.
Some Cuts Come with an Expiration Date
What is it? Not all the cuts last forever. In fact, many of the cuts impacting the lower to middle income taxpayers expire in 2025.
What does it mean to you? 23 provisions are set to expire unless they are renewed / revamped. Among them are: reduced income tax rates for individuals, increased child tax credit, increased standard deduction and AMT exemption. Without those provisions, the TCJA will become expensive for many middle class taxpayers.