How the 2018 Tax Reform Affects You

With the tax season upon us, many are wondering about how all the new Tax Reforms will affect them. Here is your quick guide to the most important changes

2018 Tax Brackets 

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Standard Deduction and Personal Exemption

The standard deduction has basically doubled for all filers, but the personal exemption has been eliminated. The marriage penalty is also gone.
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Child Tax Credit

• In 2018, the Child Tax Credit (CTC) doubles in value from $1,000 to $2,000. Additionally, $1,400 of the credit is now refundable. That means after your tax liability is paid, you will receive any remaining refundable portion of the credit in a tax refund. But like most tax credits, the amount available is subject to phase-outs beginning with an adjusted gross income (AGI) of $200,000 for single taxpayers and an AGI of $400,000 for those filing a joint return.

​Education tax benefits

• The new tax reforms still allow taxpayers with student loans to claim a deduction of up to $2,500 for the interest paid on those loans each year. One key change for this deduction for those who qualify is that it can be claimed without itemizing deductions.
• College 529 savings plans -  Up to $10,000 in those accounts can now be used to cover the cost of K-12 education annually. That includes some expenses related to homeschooling. Previously those funds could only pay for college tuition and fees.

Retirement Plans

• Laws enacted in 2017 and 2018 make it easier to access retirement funds needed to recover from federally declared disaster areas in 2016, 2017 & 2018.  Some of these provisions include eliminating the 10% early withdrawal penalty, include a qualified hurricane distribution in income over a 3 year period, repay distributions to the plan, and have expanded loan availability and an extended loan repayment period.

Itemized Deductions 

​Because of the effect of changes to the standard deduction and limitations on itemized deductions, the use of itemized deductions will likely be reduced for most taxpayers.  The income based limit on overall itemized deductions has been eliminated. The following is a summary of changes to itemized deductions:

• Foreign property taxes will not be eligible for deduction;
• State & local income tax, property tax and personal property tax are limited to $10,000 for married couples filing jointly, and $5,000 for married couples filing separately and single taxpayers. (Property taxes associated with carrying on a trade or business (such as a rental property) are fully deductible;
• No deduction is available for interest on home equity loans;
• Interest on acquisition debt for a home mortgage is limited to the interest on the first $750,000 of debt ($375,000 for married couples filing separately).  Again, any interest paid in connection with a trade or business or rental property are fully deductible. If the loan was originated before December 15, 2017,the former limits of $1 Million and $500,000 of total loan will apply;
• Medical expenses must exceed 7.5% of Adjusted Gross Income to be considered for deduction; (This will be increased to 10% of AGI for 2019)
• Charitable donations made to public charities may be deducted up to 60% of AGI.  Deduction for college athletic seating rights is eliminated;
• Casualty and theft loss deductions will only be permitted for federally declared disasters;
• Deductions for gambling losses and other expenses related to gambling are limited to gambling winnings;
• No miscellaneous itemized deductions will be permitted;
• The overall limitation on itemized deductions will be suspended for 2018 through 2025.
  
  

Lost Deductions

• Moving expenses
• Unreimbursed employee expenses
• Employer-subsidized parking and transportation reimbursement
• Casualty and theft losses (except those attributable to a federally declared disaster)
• Tax preparation expenses
• Other miscellaneous deductions previously subject to the 2 percent AGI cap

Mortgage Interest

• The deduction can only be taken on mortgage debt of up to $750,000.
  

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Medical Expenses

• The threshold for medical expenses has been reduced from 10% of adjusted gross income (AGI) to 7.5% of AGI.

BUSINESS TAX CHANGES!

 Passthrough Deduction for Qualified Business Income

•  Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
• Eligible taxpayers may also be entitled to a deduction of up to 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property. The sum of these two amounts is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain.. The deduction is available, regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.

Meals & Entertainment Business Expense Deductions

• The 2017 TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.
• Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
• Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.

With so many changes, make sure you have a tax professional prepare or review your tax filing before submitting for your tax return this year!

Want to book a consultation - click here!
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