The most substantial tax changes in 3 decades will take effect this year. The tax reform passed by congress in December of 2017, will have significant changes that will impact on individual taxpayers. The changes made in the new tax reform bill are as follows:
* Double standard deductions. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. To help cover the cost, personal exemptions and most additional standard deductions are suspended.
* Reduce income tax brackets. The bill retains seven brackets, but at reduced rates, with the highest tax bracket dropping to 37 percent from 39.6 percent.
* Raises the child tax credit. The child tax credit increases to $2,000 from $1,000, with $1,400 of it being refundable even if no tax is owed. The phase-out threshold increases sharply to $400,000 from $110,000 for joint filers, making it available to more taxpayers.
* Family tax credit added. Dependents ineligible for the child tax credit can qualify for a new $500-per-person family tax credit.
* Expands the use of 529 education savings plans. Qualified distributions from 529 education savings plans, which are not subject to tax, now include tuition payments for students in K-12 private schools.
* Doubles estate tax exemption. Estate taxes will apply to fewer people, with the exemption doubled to $11.2 million ($22.4 million for a married couple).
There will be cuts to certain deductions such as:
* Cuts some above-the-line deductions. Moving expense deductions get eliminated except for active-duty military personnel, along with alimony deductions beginning in 2019.
* Cuts the 2 percent miscellaneous deductions. Most miscellaneous deductions subject to the 2 percent of adjusted gross income threshold, are now gone.
Caps and limitations to certain itemized deductions:
* Caps on state and local tax deductions. State and local tax deductions are limited to $10,000 total for all property, income and sales taxes.
* Caps mortgage interest deductions. For new acquisition indebtedness, mortgage interest will be deductible on indebtedness of no more than $750,000. Existing mortgages are unaffected by the new cap as the new limits go into place for acquisition indebtedness after Dec. 14, 2017. The act also suspends the deductibility of interest on home equity debt.
* Limits on theft and casualty losses. Now only available for federally declared disaster areas.
* Weakens the alternative minimum tax (AMT). The bill retains the alternative minimum tax but changes the exemption to $109,400 for joint filers and the phase-out threshold to $1 million. The changes mean the AMT will affect far fewer people than before.
* Reduces pass-through business taxes. Most owners of pass-through entities such as S corporations, partnerships and sole proprietorships will see their income tax lowered with a new 20 percent income reduction calculation.
The new tax reform can be confusing. If you have questions or need assistance with a 2018 tax strategy, contact our office at (866) 497-9761 to schedule an appointment with our advisors.