The Rich Life Blog

What the Tax Reform Package Means for You

Posted by Dan Larson

January 18, 2018

On December 20th Congress passed the Tax Cuts and Jobs Act which will enact significant changes to the U.S. tax code starting on January 1, 2018. Although the specific tax changes & planning implications are far-reaching and will take us all some time to digest, I’d like to briefly address the two most pressing questions that may be on your mind: “How will my income taxes change next year?” and “Is there anything I should do before year end?”.

 

How will my Income Taxes Change?

Although not exhaustive, below is a list of seven substantial changes to individual income taxes that will impact a majority of taxpayers. These changes are set to begin January 1, 2018 and will expire after December 31, 2025.

Tax Brackets Lowered By 1-3%: The first chart shows changes for those filing as ‘Single’. The second show the changes in tax brackets for married couples filing jointly:

New Rate New Income Bracket | Old Rate Old Income Bracket
10% Up to $9,525 | 10% Up to $9,525
12% $9,525-$38,700 | 15% $9,525-$38,700
22% $38,700-$82,500 | 25% $38,700-$93,700
24% $82,500 – $157,500 | 28% $93,700-$195,450
32% $157,500-$200,000 | 33% $195,450-$424,950
35% $200,000-$500,000 | 35% $424,950-$426,700
37% $500,000+ | 39.6% $426,700+

 

New Rate New Income Bracket | Old Rate Old Income Bracket
10% Up to $19,050 | 10% Up to $19,050
12% $19,050-$77,400 | 15% $19,050-$77,400
22% $77,400-$165,000 | 25% $77,400-$156,150
24% $165,000-$315,000 | 28% $156,150-$237,950
32% $315,000-$400,000 | 33% $237,950-$424,950
35% $400,000-$600,000 | 35% $424,950-$480,050
37% $600,000+ | 39.6% $480,050+


*New brackets for Head of Household and Married Filing Separate filing status are also included in the bill but omitted from this discussion. 

Personal Exemptions Repealed: In prior years, you were eligible to claim a $4,050 deduction for yourself, your spouse, and any dependents included on your tax return. Starting January 1, 2018 the personal exemption goes away.

Child Tax Credit Expanded: The Child Tax Credit increases from $1,000 per dependent child (under age 17) to $2,000 per child and the phaseout for this credit increased considerably to $400,000 for Married Filing Joint ($200,000 for other filing statuses). Under the new bill, a new credit of $500 is available for dependents who are 17 or older (college-aged children, parents, other family members).  The tax benefits from this expanded credit are intended to help replace the lost deductions of personal exemptions for those with dependents.

Increased Standard Deduction: The standard deduction will nearly double – increasing to $24,000 for Married Filing Joint, $18,000 for Head of Household, and $12,000 for all others. This change, coupled with reduced itemized deductions (see below) will mean that many more taxpayers will begin claiming the standard deduction in 2018 rather than itemizing.

Itemized Deduction Limitations: The total allowable deduction for all state & local income/sales tax + real estate taxes will be limited to $10,000. Also, there will be no deduction for miscellaneous expenses that previously had to exceed 2% of gross income (i.e. unreimbursed business expenses, tax preparation fees, investment management fees, etc). Taxpayers will still claim the greater of the increased standard deduction or their itemized deductions.  And itemized deductions will still include medical expenses (exceeding 7.5% of income), mortgage interest, charitable contributions, state & local income/sales taxes, and real estate taxes.  However, the new $10,000 limitation on state taxes + real estate taxes will significantly curb itemized deductions for those with larger state income tax liabilities and/or larger property tax bills.

Alternative Minimum Tax (AMT): The AMT was not repealed for individual taxpayers, but the income limits were increased.  This is good news because these increased limits, along with the other changes to itemized deductions, will cause far fewer taxpayers to be subject to AMT beginning in 2018.

Pass-through Income Deduction: A new 20% deduction for ‘qualified business income’ from a pass-through entity (LLCs, partnerships, S corporations, sole proprietors). There are limitations on this deduction based on income level and whether the business is considered a certain ‘service industry.’  But many self-employed and small business owners will see a new tax savings as a result of this change.  This piece of the legislation in particular is complicated and, if applicable to you, will require further discussion with your tax advisor in 2018.

Is There Anything I Should Do Before Year End?

Maybe. For the majority of tax payers, it is likely that next year’s tax bill will be lower than this year’s. For these individuals, it might make sense to defer any additional income into 2018 (if possible) and accelerate expenses/deductions into 2017. Wealthquest President James Lenhoff discussed specifics of this strategy with Fox19.

For self-employed and small business owners, that may mean holding off on any year end invoicing and instead accelerating upcoming purchases for equipment, supplies, etc. For other taxpayers, an increased standard deduction in 2018 coupled with new limits on certain itemized deductions means you may start claiming the standard deduction for the first time next year.  If 2017 is indeed your last year itemizing deductions, you may consider:

  • Additional charitable giving before year end: clean out your closets, fulfill future year pledges early, contribute to a donor advised fund. 
  • Make state and local 4th quarter estimated tax payments before December 31st (don’t wait until the January 15, 2018 due date).
  • Consider prepaying your upcoming 2018 real estate tax bills before December 31st: this could be especially beneficial if you expect your 2018 real estate taxes + 2018 state/local income taxes to be greater than $10,000.

A note of caution: Be aware of the impact of the Alternative Minimum Tax (AMT) in 2017: prepaying your real estate taxes or state/local income taxes before year end will not yield any additional 2017 tax benefit if you are subject to AMT in 2017.  If you have been subject to AMT in the past, you may want to discuss with your advisor before making any extra year end payments.

 

Dan Larson is the Director of Tax Planning at Wealthquest, a Cincinnati-based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.



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