New federal tax-reform law has made some substantial changes to the U.S. tax code, having a major impact on American taxpayers’ financial plans – both for individuals and corporations. In fact, the bill presents the most significant tax changes in the United States in more than 30 years.
With that in mind, here’s a quick-and-dirty guide to understanding all of the changes that will go into effect so you can plan for 2018 – and beyond – accordingly.
- Marriage Penalty: The so-called marriage penalty has been effectively eliminated for everyone except married couples earning more than $400,000 annually.
- Standard Deduction & Personal Exemption: The higher standard deduction has roughly doubled for all filers, but the valuable personal exemption has been eliminated.
- Capital Gains Taxes: Short-term capital gains will still be taxed as ordinary income, though they will likely be taxed at a different rate than they were before.
- Parent Tax: The bill doubles the credit from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400. And if your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.
- Education Tax Breaks: One significant change is the expansion of the available use of funds saved in a 529 college savings plan to now include levels of education preceding college.
- Mortgage Interest: The mortgage interest deduction can now only be taken on mortgage debt of up to $750,000 for mortgages taken after Dec. 15, 2017. And the interest on home equity debt can no longer be deducted at all.
- Charitable Contributions: Taxpayers can now deduct donations of as much as 60 percent of their income, and donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.
- Medical Expenses: The threshold for the medical expenses deduction has been reduced to 7.5 percent of your adjusted gross income.
- The SALT Deduction: The final version of the bill keeps the ‘state and local taxes’ deduction, but limits the total deductible amount to $10,000, including income, sales, and property taxes.
- The Pass-Through Deduction: Under the new law, taxpayers with pass-through businesses will be able to deduct 20 percent of their pass-through income.
- Alternative Minimum Tax: The tax reform bill permanently adjusts the AMT exemption amounts for inflation and makes them significantly higher initially in 2018.
- Inflation: The new law adopts a metric called the Chained CPI which assumes that if a particular good or service gets too expensive, consumers will trade down to a cheaper alternative, allowing tax bracket thresholds to rise slower, as well as other IRS inflation-sensitive numbers, such as eligibility limits for certain deductions and credits.
- Estate Tax Exemption: The new tax law states that individuals get an $11.2 million lifetime exemption and married couples get to exclude $22.4 million.
- Corporate Tax Rates: The bill lowers the corporate tax rate to a flat 21 percent on all profits. Additionally, the corporate AMT of 20 percent has been repealed.
- Territorial Tax System: The tax reform bill changes the U.S. corporate tax system from a worldwide one to a territorial system so that U.S. corporations will no longer have to pay U.S. taxes on profits earned abroad.
- Repatriation of Foreign Cash & Assets: The new tax law sets a one-time repatriation rate of 15.5 percent on cash and equivalent foreign-held assets and 8 percent on illiquid assets.
And while many deductions and policies will remain under the new tax law, there are several that won’t, including:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Other miscellaneous deductions previously subject to the 2 percent AGI cap
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
- Obamacare penalties will go away in 2019
It’s important to note that most of the changes to individual taxes made by the bill are temporary as they’re set to expire after the 2025 tax year. But until then, taxpayers can expect to see a change in their paychecks after January 1 as employers modify their withholdings to adapt to the newly passed 2018 tax brackets.
At Bedinghaus & Company, we understand that all of these changes can be confusing and even overwhelming – but we’re here to help. Contact the professionals at Bedinghaus today to make the most informed financial decision this tax year – and beyond.