Big Tax Changes Ahead for 2018
Most individual tax provisions are temporary and expire after 2025. Unless extended by Congress, the provisions will revert automatically to the rules in effect for 2017.
Standard deductions nearly double to $24,000 for couples, $12,000 for singles and $18,000 for household heads. Taxpayers 65 and older and blind persons get $1,250 more per person ($1,550 if unmarried). The result of this change means that far fewer people will itemize.
Many deductions have been eliminated. Personal exemptions for individual filers and their dependents are repealed. Except for the military, deductions for job-related moves are eliminated. All miscellaneous write-offs subject to the 2% of AGI threshold including employee business expenses, brokerage and IRA fees, hobby expenses and tax return preparation costs have been eliminated. Also gone are theft loss deductions and personal casualty losses (except losses in presidentially declared disaster areas). Alimony deductions for post-2018 divorce decrees are no longer deductible although recipients will not be taxed on alimony they receive.
Other deductions have been reduced. Home mortgage interest can be deducted on up to $750,000 of new acquisition debt on a primary and second residence...down from $1 million - effective for mortgage debt incurred after December 14, 2017. No write-off is allowed after 2017 for interest on existing or new home equity loans.
Some deductions have been preserved or enhanced. The charitable contribution write-off is modified. The adjusted gross limitation on cash donations to qualified charities is bumped up from 50% to 60%. Medical expense deductions have been retained and for 2017-2018, the adjusted gross income threshold has been reduced from 10% to 7.5%. The write-off for personal gambling losses to the extent of winnings has been retained.
The phaseout of itemized deductions has been eliminated for upper income individuals.
While there are still seven tax brackets, break points and tax rates have been lowered.
Tax rates on long-term capital gains and qualified dividends do not change but gains are now based on income thresholds. The 0% rate will continue to apply for taxpayers with taxable income under $38,600 on single filed returns and $77,200 on joint returns. The 20% rate starts at $425,800 for singles and $479,000 for joint filers. The 15% rate applies for filers with incomes between those break points. The 3.8% surtax on net investment income remains, effective for single people with modified adjusted gross income over $200,000 and $250,000 for married persons.
The alternative minimum tax has been retained but with higher exemptions. $109,400 for joint return filers and $70,300 for singles and household heads. The exemption phaseout zones start at much higher income levels - $1 million for couples and $500,000 for single people and heads of household.
The requirement the taxpayers have health insurance, qualify for an exemption or pay a fine has been repealed after 2018.
The child tax credit is doubled to $2,000 for each dependent under age 17, with up to $1,400 of the credit refundable to lower-income taxpayers. The income phaseout thresholds are much higher at an AGI of $400,000 for couples and $200,000 for all other filers.
There is a $500 credit for each dependent who is not a qualifying child including for example, an elderly parent or a disabled child. The credit is nonrefundable and phases out under the same thresholds as the child tax credit.
The lifetime estate and gift tax exemption has doubled to $11 million which means that far fewer estates will be subject to the estate tax. The annual gift tax exclusion for 2018 is $15,000 per donee. There is no change in the asset step-up basis for heirs. The income tax rates and brackets for trusts and estates have been revised.
The kiddie tax has been changed so that unearned income of children will be taxed at the ordinary income and taxable gains rates applicable to trusts and estates, and not at their parents' marginal tax rate, as before.
Generally, tax benefits for retirement savings haven't been curtailed with the exception of Roth IRA conversions. The new law bars IRA owners who convert their traditional IRAs to Roth IRAs from later undoing the conversion and recovering the income tax paid on the switch.
529 college savings plans are enhanced to allow annual distributions of up to $10,000 per student to pay tuition for elementary and secondary education.
C corporations will be taxed at a flat rate of 21% down from a top rate of 35%. This is a permanent change that takes effect in 2018. Unlike the individual AMT, the AMT for corporations has been eliminated.
Many individual owners of pass-throughs will get a new 20% deduction of qualified business income affecting proprietors and owners of S corporations, partnerships and LLCs. The provisions are complex with lots of limits and restrictions. The break phases out for high earners in professional service fields such as law, consulting, accounting, health or financial services with taxable incomes in excess of $315,000 for joint returns and $157,500 for all other taxpayers.
The write-off for trade or business losses on individual returns is capped. The amount of trade or business losses that exceed a $500,000 threshold for couples and $250,000 for other filers is nondeductible, but any excess can be carried forward.
The deduction for interest on business debt is limited. Net interest write-offs will be capped at 30% of adjusted taxable income with disallowed interest carried forward. Firms with $25 million or less of gross receipts, real estate companies and certain regulated utilities will be exempt.
Many business breaks are eliminated or reduced. Business entertainment. Country club dues. The 9% domestic production deduction. Net operating losses can offset only 80% of taxable income, and net operating loss carrybacks are generally prohibited. Tax deferred like kind exchanges are limited to real property not held primarily for sale. Sexual harassment settlement payments aren't deductible if subject to a nondisclosure agreement.
Deductions that employers take for the cost of transportation related fringe benefits such as mass transit passes and parking is disallowed. Meals in on-premises dining facilities such as workplace cafeterias are reduced to 50% through 2025 and then eliminated in later years.
For 2018 and 2019, businesses that provide paid family or medical leave to employees get a new credit generally equal to 12.5% of the amount of wages paid during the period of leave.
We will provide more information on specific changes as the IRS issues regulations which will determine how these new changes will be implemented.