Implications of The 2018 Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act made dramatic changes to federal tax law - worth reviewing as households and businesses refine their income tax strategies.


Individuals

Income tax brackets have changed. The previous 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% brackets have been restructured to 10%, 12%, 22%, 24%, 32%, 35%, and 37% percentages slated to apply from 2018 through 2025. Thresholds for these brackets in 2018 are shown below:1
Tax Cuts and Jobs Act Tax Brackets 2018 to 2025

The individual health insurance requirement has been eliminated. Penalties instituted by the Affordable Care Act on individuals who do not have qualifying health coverage are no longer in effect starting in 2018.

The standard deduction has nearly doubled, to make up for the disappearance of the personal exemption. The new standard deductions, per filing status:

=> Single filer: $12,000 increased from $6,500
=> Married couples filing separately: $12,000 increased from $6,500
=> Head of household: $18,000 increased from $9,350
=> Married couples filing jointly & surviving spouses: $24,000 increased from $13,0002

The estate tax exemption has doubled from its 2017 level. Very few households will pay estate taxes between 2018 and 2025. The 2018 estate tax threshold starts at $11.2 million for individuals and $22.4 million for married couples, and through 2025 these amounts will be indexed for inflation. The top estate tax rate stays at 40%.2,3

The SALT (State And Local Tax) deduction now has a $10,000 ceiling ($5,000 for married taxpayers filing separately). State Residents can now only deduct up to $10,000 of some combination of either state and local property taxes or state and local income or sales taxes per year. Taxes paid or accumulated as a result of business or trade activity are exempt from the $10,000 limit. 1,3

The Child Tax Credit is now set to $2,000. Phase-out thresholds for the credit have increased to the following modified adjusted gross income (MAGI) levels:
=> $400,000 for married couples filing separately, up from $110,000 in 2017.
=> $200,000 for single filers or head of household, up from $75,000 in 2017.4

Many itemized deductions are gone through 2025. Under the current reforms, moving expenses, losses due to casualty and theft have been discontinued. Employee expenses such as subsidized parking and transit, home office, unreimbursed travel and mileage and other unreimbursed employee expenses are no longer deducted. Tax preparation fees, investment fees and expenses, separately paid IRA trustee fees, and convenience fees for debit and credit card use for federal tax payments are also gone. 5

Home equity loan interest is no longer deductible if unless used to buy, build or substantially improve the taxpayer’s home. 6

Businesses

The corporate tax rate is now a 21% flat tax. Previously, corporations with annual profits of less than $50,000 had a lower tax rate of 15% while corporations with taxable income of $75,000 or less looked at no more than a 25% marginal rate. More profitable corporations faced a rate of at least 34% with a maximum of 35%. The new 21% flat rate aligns U.S. corporate taxation with the corporate tax treatment in numerous other countries. 3 Many small businesses have the ability to deduct 20% of their earnings. Business owners whose firms are LLCs, partnerships, S corporations, or sole proprietorships can now deduct 20% of qualified business income, reducing their tax liability. Trusts, estates, and cooperatives are also eligible.3

Not every pass-through business entity will qualify for this deduction. Part II of H.R.1 specifies a phase-out range for specific professional services businesses in medical, legal, and consulting field that begins above $157,500 for single filers and above $315,000 for joint filers. The deduction for a business other than a specified service business is capped at 50% of total wages paid or at 25% of total wages paid, plus 2.5% of the cost of tangible depreciable property, whichever amount is larger.3

The Section 179 deduction and the bonus depreciation allowance have doubled. Business owners can deduct the whole cost of an asset in its first year up to a $1 million cap. The first-year “bonus depreciation deduction” is now set at 100% with a 5-year limit, so in 2018 a company can now write off 100% of qualified property costs through 2022. Bonus depreciation now applies for used as well as new equipment.1

A tax-sensitive investing approach is always specific to the individual. Therefore, any strategy needs to start with an in-depth discussion with your tax or financial professional.

1 - cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions

2 - cnbc.com/2017/12/22/the-gop-tax-overhaul-kept-this-1300-tax-break-for-seniors.html

3 - investopedia.com/taxes/how-gop-tax-bill-affects-you/

4 - fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx

5 - forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform

6 - irs.gov/newsroom/interest-on-home-equity-loans-often-still-deductible-under-new-law