Federal tax laws significantly changed for 2018. The Tax Cuts & Jobs Act, passed and signed into law in December 2017, greatly alters key regulations within the Internal Revenue Code. The IRS is still busy implementing changes, here’s what is certain: most Americans will need to rethink their annual tax strategies.
Here is a summary of the major modifications, most scheduled to sunset in 2025 unless renewed:
The estate tax exemption doubles. For 2018, the individual exemption rises from $5.6 million to $11.2 million. The exemption for married couples rises from $11.2 million to $22.4 million. Wealth Management estimates that less than 1,000 estates per year will be taxed with these new thresholds in place.1,2
The Alternative Minimum Tax phase-out thresholds increase greatly. Currently, these thresholds are set at $120,700 for individuals and $160,900 for married couples. For 2018, they jump north to $500,000 for individuals and $1 million for married couples.1 The corporate AMT dies, permitting even greater tax savings for businesses and promote more R&D and capital investment.1
The 1031 (“like-kind”) exchange rule now only applies for real property. Other types of like-kind exchanges are disallowed.3
Income tax brackets have been revised. The 10% bracket remains in place, with the other six brackets now set at 12%, 22%, 24%, 32%, 35%, and 37%.4 Working taxpayers are looking at lower federal income tax and retirees may see less taxes on 401(k) or IRA withdrawals.
The personal exemption has been eliminated. This amounts to a kind of trade-off given the near-doubling of the standard income tax deduction.4
The standard income tax deduction increases to five figures. The Tax Cuts & Jobs Act raises the standard deduction to $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples,4 meaning that more taxpayers may end up claiming the standard deduction now that many key deductions have been eliminated or capped.
Most itemized deductions are gone. Among the ones retained: the charitable contribution deduction, the mortgage interest deduction, the state and local tax (SALT) deduction, the student loan deduction, the medical expense deduction, and tuition waivers for graduate students. The mortgage interest deduction now has a $750,000 ceiling (it was $1 million). The SALT deduction is now restricted to a combined $10,000 for forms of income, sales, and property tax (note that taxes paid or accrued in carrying on a trade or business are not limited to the $10,000 cap). Regarding medical bills, taxpayers can deduct medical expenses equal to 7.5% or more of their incomes for tax years 2017 and 2018, rather than the 10% norm.1, 4
Read more about itemized deductions here.
The largest corporate tax cut in American history takes effect. In 2018, the top corporate tax rate falls from 35% to 21%. This cut is further enhanced by three other tax perks geared to large firms. The current tax code encourages corporations to hold cash abroad with a heavy tax on repatriated earnings; the Tax Cuts & Jobs Act slashes that tax to a mere 15.5%. In addition, companies can deduct 100% of the costs of new capital equipment purchases for five years, and the ceiling on Section 179 expensing doubles to $1 million.1,4
Taxation of LLCs, S-corps, and partnerships changes dramatically. Most pass-through business entities can now deduct 20% of their qualified business income from federal income taxes. The word to remember here is “most.” Law, health care, and professional services firms can only claim this deduction if the household taxable income of the business owner(s) falls below $315,000 (joint filers) and $157,500 (other filing statuses).4
The 20% deduction on pass-through business income also applies to qualified REIT dividends. It is also allowed for qualified publicly traded partnership income.3
Many Americans may pay lower taxes in the short term. Adherents of the Tax Cuts & Jobs Act claim the tax savings will amount to about $2,000 a year for the “typical” family; this may vary widely from household to household. Next year, 47.5% of Americans are projected to pay no income taxes because of the Act; that would be a 3.5% increase from 2017.1
The individual health care mandate will be eliminated. This will happen in 2019, not 2018. The extra year will give lawmakers time to consider ways to stabilize rising health care premiums.1
The Child Tax Credit doubles. The Tax Cuts & Jobs Act increases the CTC to $2,000. The first $1,400 of the credit is refundable, and the phase-out threshold now starts much higher at $400,000 for married couples.4
This material was prepared by third party vendor and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1 – taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/ [12/18/17]
2 – wealthmanagement.com/estate-planning/estate-planning-implications-gop-tax-plan [11/6/17]
3 – fool.com/retirement/2017/01/22/estate-planning-in-2017-heres-what-you-need-to-kno.aspx [1/22/17]
4 – washingtonpost.com/news/wonk/wp/2017/12/15/the-final-gop-tax-bill-is-complete-heres-what-is-in-it/ [12/15/17]