Now that we are nearly halfway through tax year 2018, I wanted to provide a few reminders of what has changed related to income taxes this year because of the passing of the Tax Cuts and Jobs Act back in December 2017. The law made major revisions to the US tax code for both individuals and corporations – the most significant tax changes in more than 30 years. Not all of the changes were beneficial to the taxpayer, but many were.
Individual income tax rate brackets were adjusted across the board for all income levels bringing lower overall income tax liability for each level of income. There are still seven brackets that range from 10% up to 37%.
The allowed standard deduction amount nearly doubled from $12,700 for a married couple up to $24,000. Similar increases in the standard deduction for single status and head of household status also came into play.
One significant downside to the new law is that the personal exemption deduction (formerly $4,050 per person claimed on the return) was eliminated entirely. In some cases, the higher standard deduction will make up for the loss of this deduction but in others it will not.
The child tax credit (formerly a maximum of $1,000 per qualifying child) rose to a maximum of $2,000 per qualifying child under the new law. A child must be 16 years of age or younger at the end of the tax year to qualify for this credit. For taxpayers with large families and several kids under 17, this new provision will prove to be lucrative.
The moving expense deduction was eliminated so there is no longer a tax benefit derived from the often-expensive cost to move from one location to another.
The total amount of state and local tax (SALT) deduction allowed on schedule A, itemized deductions, is capped at $10,000 per year under the new tax law. Particularly in high income tax states such as California and New York, this restriction will prove costly to many taxpayers who had enjoyed a large tax deduction on schedule A in the past.
Business owners of all types including sole proprietors, partnerships, S-corporation shareholders, etc. will enjoy a 20% net income deduction under the new tax law. High income taxpayers in certain industries will face some restrictions on eligibility for this deduction, but most business owners will reap a large tax savings from this new provision. The essence is that the taxpayer will be able to avoid paying income tax on 20% of their net business income each year. The tax savings under this provision could be very large and motivate many taxpayers to move forward with business ventures they may have not pursued previously.
Regarding schedule A, the miscellaneous itemized deduction section was eliminated entirely under the new law. This is very bad news for taxpayers who are paid as a W-2 employee but incur large out-of-pocket employee-related expenses each year. There are many industries that fit this description and I have seen many employee groups approach their employer seeking to have their employer cover the cost of these expenses formerly paid by the employee, even if it means paying the employee less in wages commensurate to the expenses being absorbed by the employee. In a case like this, the employees benefit greatly, and the employer is theoretically not out anything to make this change.
Historically, spousal maintenance expenses have been tax deductible to the payor and taxable income to the recipient. Starting with any divorces finalized in 2019, the spousal maintenance payments will no longer be tax deductible to the payor and will no longer be taxable income to the recipient. Divorces that finalized before 2019 will be grandfathered in under the old rules keeping the payments deductible and taxable, respectively.
A new C-corporation flat tax rate of 21% was created replacing the progressive tax rate brackets that existed previously. Those brackets started at 15% for the first $50,000 of taxable income and included a maximum corporate rate of 39%. This change has likely sparked more business ventures that may not have moved forward without this business tax incentive.
Lastly, the new tax law provides greater benefits to business owners who purchase capital assets eligible for the section 179 depreciation expense deduction and the improved bonus depreciation provisions. In other words, business owners will be able to deduct the business-use percentage of vehicles and other equipment they purchase more freely in the year of purchase rather than expensing these items over the former time frames of five or seven years.
The bottom line of these 2018 changes may be that adjustments are necessary to the amount of wage withholding taken from your paycheck or to the quarterly estimated income tax payments you are on track to make. In many cases, you may be paying more into the system this year than you need to which will create a significant refund when preparing your 2018 tax returns early next year. We can determine this by preparing a 2018 tax projection for you and then discussing with you what the projection shows your end result would be if no changes are made. If changes are deemed necessary and made now, you could enjoy more funds in your pocket between now and year-end rather than waiting until your tax return is filed next year to get those funds back.
If you have any questions regarding your 2018 tax situation, please contact us. We would be glad to assist in that analysis.