Good & Bad News Regarding the New Tax Law
The Good and Bad News Regarding the New Tax Law
Good News: Bigger Standard Deduction,
A hallmark of the new law is the near doubling of the standard deduction to $12,000 on single returns, $18,000 for head-of-household filers and $24,000 on joint returns … up from $6,350, $9,350 and $12,700 in 2017. As under the old law, individuals age 65 or older and blind people get even higher standard deductions.
Bad News: Goodbye Exemptions
In exchange for the bigger standard deductions, personal exemptions (the $4,050 deduction for each exemption claimed on a 2017 return) are eliminated. So a married couple with four kids would lose $24,300 in exemptions in exchange for the $11,300 boost in their standard deduction
Good News: Higher Child Tax Credit
Starting in 2018, the $1,000 tax credit for each child under age 17 is doubled to $2,000. Additionally, the new law significantly increases the income phase-out thresholds so that more higher-income families will pocket child credits. The credit begins to phase out for couples with adjusted gross incomes over $400,000 (up from $110,000 in 2017) and $200,000 for all other filers (up from $75,000). In addition to the enhanced child tax credit, there is a new, nonrefundable credit of $500 for each dependent who is not a qualifying child including, for example, an elderly parent or disabled adult child.
Bad News: Squeezing Homeowner Tax Breaks
Lawmakers decided to reduce – from $1,000,000 to $750,000 – the amount of debt on which homeowners can deduct mortgage interest. The limit applies to mortgage debt incurred after December 15, 2017, to buy or improve a principal residence or second home. Older loans are still subject to the $1 million cap. The new law also eliminates the deduction of interest on home-equity loans. And this change applies to both old and new home-equity debt.
Good News: Lower Tax Rates
The new law keeps seven tax brackets, but with different rates and different break points. For example, not only is the top rate lowered from 39.6% to 37%, but that rate also kicks in at a higher income level. And, note that whatever new bracket you fall in, more of your taxable income will be hit with lower rates. Although, restrictions or elimination of some tax breaks as noted below, probably means more of your income will be taxed at these rates.
Bad News: Deduction for State and Local Taxes Limited
One of the most valuable tax deductions allowed for individuals — the write off for what you pay in state and local income, sales and property taxes — is getting squeezed. Starting in 2018, the law sets a $10,000 limit on how much you can deduct of the state and local taxes you pay. You can deduct any combination of state and local income or sales taxes or property taxes, up to the $10,000 cap.
Good News: Medical Deductions Survive
The new law is actually more generous than the old one. Under the old rules, medical expenses were deductible only to the extent they exceeded 10% of adjusted gross income. For 2018, the threshold drops to 7.5% of AGI.
Bad News: Most Other Tax Deductions Get the Ax
The new law eliminates a popular deduction for moving expenses. Going forward, only members of the military can claim it. The new law also repeals all miscellaneous itemized deductions subject to the 2% of AGI threshold, including the write-off for tax preparation fees, all unreimbursed employee business expenses (including some home office deductions) and investment fees. Theft losses were also eliminated.
Good News/ Bad News: It Depends: Alimony Becomes Tax Free and Non Deductible
A big change is coming for divorce. In the past, alimony paid under a divorce decree was deductible by the ex-spouse who paid it and treated as taxable income by the recipient. Starting with alimony paid under divorce or separation agreements executed after December 31, 2018, the reverse will be true: Payors will no longer get to deduct alimony, but the payments will be tax-free for the ex-spouse who receives them. (That’s the same rule that has and will continue to apply to child support payments.)
Bad News: Kidde Tax Gets Tougher
Starting in 2018, income earned by dependent children under the age of 19 will be taxed at the same rates as trusts and estates, which are far different and possibly higher than the rates that apply to individuals
Good News: Fewer Taxpayers Subject to Alternative Minimum Tax (AMT)
While the new law retains the individual AMT, it limits the number of taxpayers ensnared by it. It does so by significantly hiking the AMT exemption and the income level at which it begins to disappear.
Good News: 0% Capital Gains Rate Survives
The new law retains the favorable tax treatment granted long-term capital gains and qualified dividends, imposing rates of 0%, 15%, 20% or 23.8%, depending on your total income. In the past, your capital gains rate depended on which tax bracket you fell in. But, with the changes in the brackets, Congress decided to set income thresholds instead. For example, for 2018, the 0% rate for long-term gains and qualified dividends will apply for taxpayers with taxable income under about $38,600 on individual returns and about $77,200 on joint returns.
Good News: Tax Relief for Pass-through Businesses
Starting in 2018, individuals who own pass-through entities—such as S corporations, partnerships and LLCs—which pass their income to their owners for tax purposes, as well as sole proprietors who report income on Schedule C of their tax returns can deduct 20% of their qualifying income before figuring their tax bill. For a sole proprietor in the 24% bracket, for example, excluding 20% of income from taxation has the same effect of lowering the tax rate to 19.2%. This gets complicated so please call our office for more information.
Good News: Increased Estate Tax Exemption
The new law doubles the amount that can be left to heirs tax-free in 2018, to about $11 million for singles and about $22 million for married couples. The amount will rise each year to keep up with inflation.
Thomas Britt | 11/20/2018