As a new year approaches, many of us will reflect on the year that has passed. Personal and professional accomplishments may take center stage. And we may take stock of any disappointments and re-calibrate as 2019 approaches.
But in any case, I know it’s a busy time. Christmas shopping, holiday parties, tree trimming, family visits, and year-end cheer may already be on the calendar.
Yet it’s not too soon to start thinking about taxes. We’ve had discussions about 2017’s tax reform, but until we’ve filed for 2018, it may still feel confusing to many.
Before we jump in, let me stress that it is my job to assist and help you! I can’t overemphasize this, and I would be happy to review the options that are best suited to your situation.
Since, we are not CPAs, we're not giving you specific tax advice, but instead providing a general overview that you can discuss with your tax advisor.
Let’s get started
Tax reform, officially known as the Tax Cuts and Jobs Act (TCJA) of 2017, was the biggest change in the tax code in over 30 years. The overhaul covered both individual and corporate income taxes. A number of people will see their tax bill decline when they file, but a few folks may see a sharper bite, especially here in Minnesota, since we lost the ability to deduct any amount above $10,000 in Minnesota taxes from our federal tax returns.
I’ll touch on some of the changes at a high level.
- Federal Tax brackets and tax rates have changed. The lowest bracket holds at 10% but the top bracket has been lowered from 39.6% to 37%. There have also been modest adjustments to the rates and income levels for taxable income.
Single filers 2018
Single filers 2017
$0 – $9,525
$0 – $9,325
$9,526 – $38,700
$9,326 – $37,950
$38,701 – $82,500
$37,951 – $91,900
$82,501 – $157,500
$91,901 – $191,650
$157,501 – $200,000
$191,651 – $416,700
$200,001 – $500,000
$416,701 – $418,400
$500,001 or more
$418,401 or more
Married filing jointly 2018*
Married filing jointly 2017
$0 – $19,050
$0 – $18,650
$19,051 – $77,400
$18,651 – $75,900
$77,401 – $165,000
$75,901 – $153,100
$165,001 – $315,000
$153,101 – $233,350
$315,001 – $400,000
$233,351 – $416,700
$400,001 – $600,000
$416,701 – $470,700
$600,001 or more
$470,701 or more
*or Qualifying Widow(er)
Source: IRS US Tax Center 2017/18 Federal Tax Rates, Personal Exemptions, and Standard Deductions
2. The personal exemption has been eliminated; child tax credit increased. The $4,050 personal exemption taken in 2017 has been eliminated. However, the child tax credit doubles to $2,000 per qualifying child, subject to income limitations.
3. The increase in the standard deduction will simplify filing for some clients. The standard deduction will rise from $6,350 to $12,000 for single filers and $12,700 to $24,000 for joint filers. The higher standard deduction and increased child tax credit will likely lower tax bills for many lower and middle-income filers. In addition, it simplifies filing every year.
4. Some itemized deductions have been reduced or eliminated. State and local income taxes, property taxes, and real estate taxes are capped at $10,000. Anything above can no longer be written off against income.
All miscellaneous itemized deductions are eliminated, including deductions for unreimbursed employee expenses, tax preparation fees, the deduction for theft, and personal casualty losses, although certain casualty losses in federally declared disaster areas may still be claimed.
The new tax law enhanced the deduction for charitable contributions by raising it to 60% of adjusted gross income from 50%.
The law preserved the deduction for unreimbursed medical expenses, temporarily reducing the limitation from 10% to 7.5% of adjusted gross income for tax year 2018 and retroactively for 2017. The floor returns to 10% in 2019.
5. Changes to the AMT–the alternative minimum tax. The dreaded AMT is still with us but will snag far fewer taxpayers since the exemption and exemption phase-out have been substantially increased. About 5 million taxpayers were expected to pay the AMT under the old law, but only 200,000 are expected to pay the AMT this year.
6. There’s a new 20% deduction for business owners. The new law gives “pass-through” business owners, such as sole proprietorships, LLCs, partnerships, and S-corps, a 20% deduction on income earned by the business. It’s a substantial benefit to business owners who aren’t classified as C-corps and wouldn’t benefit from the reduction in the corporate tax rate to 21% from 35%.
REITs and MLPs are also eligible for the deduction.
The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.
There are limitations to the new deduction and some aspects are complex. It is important to check with your tax advisor to see how you may qualify.
The points above are simply a summation of the major changes in 2018. You may see provisions that will benefit you. You may also see potential pitfalls. If you have any questions or concerns, let’s have a conversation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers ant state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
Roth IRA withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs.