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Tax Law Changes Coming for 2018

· Tax,Small Business

As if the end of a year isn’t busy enough for CPAs and business owners, with tax planning, the challenges associated with trying to predict what will happen at the end of the year, and trying to build forecasts for the year ahead, Congress decided to throw the most comprehensive tax overhaul in 30 years at us.

 

I think there’s something for everyone to love and hate in this bill, no matter your political affiliations. But, red and blue aside, let’s highlight a few of the changes that will most assuredly impact most of you.

Tax Bracket Changes

I won’t talk too much about this since everyone falls into a different bracket. But, suffice it to say that the brackets have been changed (widened, reduced, expanded, etc). We will be happy to answer specific questions on tax brackets as they arise.

Pass-through Income Deduction

Since the majority of our clients are business owners, we have already seen several emails about this one. We expect to see many more questions as the passthrough income deduction is discussed. Again, the changes associated with this part of the tax bill are complex, and beyond the scope of this simple letter, but we are confident that the majority of our small business clients will see some relief here. Beginning in 2018, individuals will be allowed to deduct 20% of “qualified business income” from a partnership, S-Corporation, or sole proprietorship. There are some tricky definitions to contend with, and some phase-outs above certain income limits, but we will spend a LOT of time discussing this with you in the coming months.

Changes to the Standard Deduction & Personal Exemptions

First, the easy one...personal exemptions are gone for 2018.

 

So, for those of you with 5 family members (two parents and three kids) who saw $20k in personal exemptions reduce your income for all these years, that deduction is gone. Completely.

Beginning in 2018, individuals will be able to claim a standard deduction in the amount of $12,000 ($18,000 for heads of households). Married individuals who file a joint return will be allowed to claim a standard deduction of $24,000. For some clients, this increased standard deduction will lessen the blow of losing the personal exemptions.

The question we have seen thus far with regard to this law change is this: “I’ve always been able to itemize my deductions on Schedule A. What happens now?”

The answer is “We will have to see.”

I know you hate that answer. However, we will have to weigh your allowable itemized deductions with the revised, higher standard deduction, and see which is higher. You’re still allowed to take the higher deduction. So, for some, nothing changes, while for others, the Schedule A will be a thing of the past.

Change to Deducting State and Local Taxes, Including Property Taxes

This one is harder to grasp. For my SC residents, the impact of this won’t be as widely felt. For our clients who reside in states with higher taxes, such as NY, NJ, and CA, the impact will be huge. In summary:

Your individual deduction for state and local taxes, including property taxes, is capped at $10k per year starting in 2018.

This means that the total of the following taxes on Schedule A will be limited to $10k:

  • State taxes withheld on your W-2 for 2018

  • State taxes paid in 2018 (possibly for what you owed the state for 2017)

  • Local taxes withheld on your W-2 and local taxes paid in 2018 (for SC, this is a non-issue)

  • Real estate taxes paid on your primary residence

  • Real estate taxes paid on a second residence, or vacant lot

  • Property taxes paid on your automobile

Anything over $10k will be lost. Several clients have asked about prepaying 2017 property or real estate taxes, which are due in early Jan 2018, before Dec 31, 2017. I say, go ahead and do it. Better to be safe than sorry.

Be careful, though….most states do NOT allow you to prepay 2018 taxes in 2017, and there is language in the tax bill disallowing a deduction in 2017 for 2018 taxes.

 

Lastly, this law change does NOT affect sole proprietorships, farms, or rental property owners from deducting the property taxes they pay as part of the business. The limitation I'm referring to here is only for Schedule A deductions.

Large Expansion of the Child Tax Credit

For married taxpayers filing a joint return, and income less than $400k ($200k for all other filers), the child tax credit has been expanded to $2,000 per qualifying child. The maximum refundable amount of this credit is capped at $1,400. This is huge since the thresholds were lower before.

And keep in mind, you always want a tax “credit” as opposed to a “deduction.” A credit is a dollar-for-dollar reduction in the actual tax you pay.

Various Other Items

I won’t dig too deeply into these other items, but we can always discuss them if they’re particular to your tax position:

  • Moving expenses - no longer allowed after 12/31/17
  • Alimony - no longer deductible when paid, and no longer includable as income to the recipient for divorce agreements executed AFTER 12/31/18
  • Educator’s classroom expenses - still deductible at the $250 level after 12/31/17
  • Home Equity Line Interest - no longer deductible after 12/31/17, no matter when the home equity line was established. However, if the interest is applicable to purchasing or improving a home, it could still be deductible. The limitation applies when the borrowed funds are used for something OTHER THAN purchasing or improving a home. We are awaiting further clarification here.

For those of you who engage us at the Planner Level for tax preparation, we will be running tax estimates for you to determine the impact of these changes. No question about that.

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