Playing Your 2018 Tax Trump Card
Love him or hate him, President Trump just delivered one of the largest tax cuts in American history. The last major overhaul of the tax code was in 1986, so tax reform was way overdue. The first thing you need to know is that the changes will be effective for 2018. The tax bill will not affect your 2017 tax returns. Let's take a look to see if you were dealt a winning hand with the reforms, or at least dealt some good cards.
Good Card: Changes to 2018 Tax Rates and Claiming Dependents
One of the good cards all taxpayers received is a reduction in tax rates. There are still seven brackets, but they're lower and longer. For example, in 2017, if a married couple hits their top federal tax bracket (39.6 percent) at $470,000, that same couple in 2018 will hit their top bracket of 37 percent at $600,000. With this card, everybody gets a lower tax rate. That's a good card to have.
You also have a winning card if you claim dependents. The child tax credit has increased from $1,000 to $2,000 per child under age 17. While this is great news for parents, it gets even better. This credit used to phase out at $110,000 for married couples, but under the new code, the phase-out occurs at $400,000. With this card, many more taxpayers will be able to claim this valuable credit.
There's also a new $500 credit for taxpayers claiming dependents ages 17 and older. This will help taxpayers who claim college-aged kids or claim their parents as dependents.
Good Card: 2018 Tax Changes for Small Businesses.
Small business owners got dealt a great hand in this tax bill. Flow-through or pass-through businesses such as S corporations, partnerships, and sole proprietors may qualify for special tax deductions. That deduction is 20 percent of their company's net profit. This is huge!
Let's say you're an S corp shareholder and you get a pass-through profit of $100,000. In 2018, you may only pay taxes on $80,000 instead of $100,000. This deduction does have some phase-out rules. For joint filers, phase-out starts at $315,000. It's completely eliminated at $415,000.
If you're an owner of a C corporation, you were also dealt some good cards. C corps will pay a new federal flat tax of 21 percent. Previously, the federal corporate tax rate started at 15 percent and quickly went as high as 39 percent. This could result in some nice tax savings!
Good Card: 2018 Tax Changes for Business Expenses
Another good card for business owners is an improvement in the ability to expense equipment. The Section 179 limit on expensing fixed assets increased to $1 million. The limit had been at $500,000 for the last several years. Next year will be a great year to buy new equipment, furniture, fixtures, etc.
Bonus depreciation has also been increased. In the past, you were only able to use bonus depreciation on brand new equipment. Now, you can claim bonus depreciation on new and used equipment you purchase.
One bad card manufacturers received is the loss of the domestic production activities deduction. This has been a special tax break for manufacturing companies that has been in the code for a good number of years. It's been eliminated for 2018.
Good Card: New and Improved Alternative Minimum Tax (AMT)
Taxpayers who've been subject to the alternative minimum tax (AMT) also received some winning cards. Although the AMT was not eliminated, it was reformed. First, the amount exempted from the AMT has increased. And, the phase-out of the exemption amount drastically increased from $495,000 to $1 million. The bottom line: much fewer taxpayers will pay the AMT.
Good Card & Bad Card: 2018 Tax Changes to Standard and Itemized Deductions
Now let's look at some areas where some taxpayers have a winning hand while others have a losing hand: taxpayers using the standard deduction versus itemized deductions.
The standard deduction doubled. That's a wonderful thing for taxpayers who use it. For a younger family that doesn't own a house, the new standard deduction is great news for them.
However, if you're a taxpayer who's been itemizing your deductions, you got dealt some bad cards. One of the worst is the change to state and property tax deductions. It's now limited to $10,000. This could potentially hurt higher-income taxpayers or taxpayers who have several properties, such as a home and a cabin or vacation property, where they’re deducting taxes from multiple properties.
Another group that got hit hard with the tax reform act was people who claim employee business expenses, such as mechanics who deduct the tools they purchase or airline employees who deduct per diems for out-of-town meals. They'll get hit very hard, as those deductions have been eliminated.
One itemized deduction that got better is the deduction for out-of-pocket medical expenses. The threshold for deducting out-of-pocket medical and dental-related expenses went down, which is a really good thing, particularly for elderly taxpayers.
There's a lot to like about this new tax reform bill. Many taxpayers will have winning hands while some won't. But overall, we see a lot of good in this. Always feel free to reach out to Kaiser Tax with any questions you have about how this may affect you individually.