2018 Tax Cuts and Jobs Act: Key Take-Aways
2018 Tax Cuts and Jobs Act: Key Take-Aways
By: Siraj Soliman, CPA
The Senate and House recently reconciled their respective tax bills and passed a conference tax bill pending signature from the President. The majority of the tax provisions made in the bill are temporary in nature, set to be applied as of January 1, 2018 and to expire at the end of 2025. Once the provisions expire, the laws will revert back to the current law.
While the actual bill is over 1,000 pages, here’s what you’ll most likely need to know about the changes in relation to the current version of the law. Since this summary doesn’t cover it all you can find the full conference bill here. Make sure to contact your tax advisor to properly plan for any changes that may be affecting you.
Income tax Rates –
Current law: Maintains seven income tax brackets for individual tax filers 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% and seven for married tax filers at 10%, 15%, 25%, 28%, 33%, 35%, 39.5%.
Conference Bill: The seven tax brackets remain, but the rates and thresholds are adjusted for individual tax filers to 10%, 12%, 22%, 24%, 32%, 35% and 37% and for married tax filers to 10%, 12%, 22, 24%, 32%, 35%, 37%.
Standard Deduction –
Current law: Standard deductions are $6,350 for individuals, $9,350 for heads of household, and $12.700 for taxpayers who are married filling jointly.
Conference bill: Standard deductions will be $12,000 for individuals, $18,000 for heads of household, and $24,000 for taxpayers who are married filing jointly.
Additional Standard Deduction –
Current law: If you’re a taxpayer who is over 65, blind, or disabled you can increase your standard deduction by $1,300.
Conference bill: There is no change to this deduction.
Personal Exemptions -
Current law: A personal exemption of $4,050 can be claimed for yourself, your spouse, and each dependent.
Conference bill: Personal exemptions are no longer allowed.
Mortgage interest Deductions –
Current law: If you itemize your deductions, you can deduct qualifying annual mortgage interest on payments made on the first $1,000,000 of principal related to a home, plus and additional $100,000 of equity debt. This $1,000,000 cap applies to mortgages on primary residences and up to one additional personal home.
Conference Bill: The $1,000,000 cap on home mortgage principal balance is reduced to $750,000 and the $100,000 cap on mortgage interest on equity debt is reduced to $0.
State and Local Income Tax Deductions (SALT) –
Current law: If deductions are itemized, taxpayers are allowed to deduct all state and local income taxes or sales taxes paid during the year. Taxpayers can also deduct the property taxes paid during the tax year.
Conference Bill: All state and local income, sales and property taxes are limited to $10,000.
Medical Expense Deductions –
Current law: If deductions are itemized, taxpayers can deduct all qualifying medical expenses that exceed 10% of their adjusted gross income (AGI).
Conference Bill: The qualified medical expense deduction will remain and be allowed to the extent that qualified medical expenses exceed 7.5% of AGI. This change is retroactive and applies as of January 1, 2017.
Miscellaneous Itemized Deductions –
Current law: If deductions are itemized, taxpayers may deduct qualified miscellaneous deductions that exceed 2% of adjusted gross income (AGI). The most common example of this is unreimbursed employee business expenses.
Conference Bill: All miscellaneous deductions are eliminated.
Above the Line Deductions –
Current law: Certain deductions are allowed as above the line deductions, meaning that they are direct reductions to your adjusted gross income. The most common above the line deductions are student loan interest, moving expenses, alimony, and teacher expenses. Each of these categories have limits to the amount you can deduct.
Conference Bill: Most above the line deductions are maintained, however, moving expenses (except for those in active duty who move pursuant to a military order), and alimony deductions (not until 2019) will be repealed.
Tuition Waivers –
Current Law: Graduate students who work as research assistants are exempt from income tax on tuition waivers they receive in leu of their work.
Conference Bill: Tuition waivers for graduate students working as research assistants remain non-taxable.
Fringe Benefits –
Current Law: Employers can provide certain benefits to their employees, like moving reimbursements and dependent care, as a tax-free compensation.
Conference bill: Most fringe benefits remain intact, however, moving expense reimbursements will no longer be tax-free.
529 Plans –
Current Law: When funds are contributed to a 529 plan, earnings from investment and distributions are not taxable as long as they are used for college tuition and room and board, fees, books supplies and equipment.
Conference bill: Same 529 rules will apply, however, the bill expands the use of the plan to allow up to $10,000 per year to be used per student for public, private, and religious elementary and secondary schools.
Child Tax Credit –
Current Law: Taxpayers with children under 17 years of age can receive a child tax credit of up to $1,000, all of which is refundable.
Conference Bill: The child tax credit is doubled to $2,000, $1,400 of which will be refundable.
Exclusions of Gain from Sale of Primary Residence:
Current Law: Taxpayers can exclude up to $250,000, or $500,000 if married filing joint, of the capital gains received from the sale of their primary residence. This rule only applies if the taxpayer has owned and lived in the home for at least two of the last five years.
Conference Bill: No change in the deductions or qualification for the deduction is made in the final version of the bill.
Affordable Care Act Mandate –
Current Law: A penalty is assessed on taxpayers who don’t have minimum healthcare coverage.
Conference Bill: There will no longer be a penalty for not maintaining minimum health care coverage.
Capital Gain Rates –
Current Law: Capital gains are categorized as short term and long term. Short term gains are gains on assets held for one year or less, these are generally taxed at your ordinary rates. Long term gains classified as gains on assets held for more than one year and are taxed at 0%, 15% or 20%, depending on income levels.
Conference Bill: The same rates and classifications as current law will apply, but the brackets will be adjusted.
Pass-through Entities –
Current Law: Pass-through entities such as S-corps, LLCs, and partnerships are not taxed on the corporate level and instead pass the income through to their shareholders and are taxed at each shareholder’s personal tax rate.
Conference Bill: Owners of pass-through entities and taxpayers other than corporations such as sole proprietorships can take a 20% of net flow-through income as a deduction, which will effectively lower their tax rate. This flow-through deduction will be disallowed for professional service businesses (law firms, medical practices, etc.) if income is above a threshold amount. Phase-ins for this limitation begin at $157,500 for individual taxpayers and $315,000 for married taxpayers.
Corporate tax relief –
Current law: Corporations that do not pass through their profits and pay tax at the corporate level pay on rates as high as 39%.
Conference Bill: The highest corporate tax rate will be lowered to 21%.
Federal Estate Tax –
Current Law: In general, the first $5,000,000 of a decedents gross estate is tax free. Any amount over the $5,000,000 lifetime exemption amount is taxed at 40%.
Conference Bill: Estate tax remains intact however the lifetime exemptions for single and married couples, respectively, are doubled.
Federal Estate Tax –
Current Law: Estates pay estate tax on gross estates that exceed the lifetime exclusion limit of $5.49 million, or about $10.98 million for married couples.
Conference Bill: Estate tax remains intact however the lifetime exemptions for single and married couples, respectively, are doubled.