Welcome all to the 2018 tax filing season! What a crazy filing season it will be, as it is the first-time filing returns after Congress passed the largest reform to the tax code in over 30 years. Of course, this makes tax preparers happy as the level of complication in preparing and planning has gone up. While there are tax breaks and reduced rates for all filers, the lion’s share of the windfall will go to the very richest folks in America. Below are some of the key changes, take a look and see how you stack up. Reach out with any questions you have BEFORE actually working with your advisor to complete your filing. January is a great time to do this as the season has not ramped up to the point where CPAs and tax preparers are crazy busy.
1) The new rates are slightly lower than the old rates almost across the board, but the bill contains the same seven brackets that existed prior to reform. The new thresholds for taxation are different as well which will complicate some planning for those going at it on their own.
2) When comparing the standard deduction vs. itemizing deductions, 2018 will offer some big changes. The standard, government given deduction nearly doubles for 2018. Single filers go from a standard deduction of $6,350 to $12,000. Married filers go from $12,700 to $24,000! This will mean many taxpayers will not itemize their deductions on their returns for 2018. This could have negative impact on the real estate market, as individuals or families hunting for lower priced homes will no longer be able to save on their taxes from buying the home. Couple this with rising interest rates and the real estate lobby is sure to have some concern.
3) For those who will still itemize, the major difference is the $10,000 cap on all taxes paid on Schedule A. When adding up state taxes, real estate taxes, and local property taxes the most that can be taken as a write-off on 2018 returns is $10,000. This is sure to affect many higher income taxpayers and residents of the wealthier states who will now have their tax deduction trimmed significantly.
4) With reform bring changes to health care, the biggest change being the elimination of the health care penalty for not having insurance. This is sure to help individuals and families many who are just trying to get by. The limit for deducting medical expenses has dropped from 10% of AGI to 7.5% so more folks will be able to write off medical expenses on their 2018 returns all things being equal.
5) For those lucky enough to make enough money to obtain a mortgage as high as $750,000, that is the most balance you can use to write off mortgage interest on 2018 returns, down from 1 million maximum loan.
6) Charitable deductions are an interesting part of reform. The most you can give to qualified charities has increased from 50% to 60% of adjusted gross income. I cannot imagine this affects anyone making less than millions of dollars as most of us don’t give ½ of our money away anyway. Gifting appreciated stock or real estate to charitable organizations is still allowed under the new law and is an amazing strategy to minimize capital gains taxes. This too will help the very top earners primarily.
7) There is no longer any deduction for the personal exemption. This will affect all returns, but the higher income filers already had this exemption limited in many cases for prior filing seasons.
8) Credits have been expanded, and this is one area where the lower and middle income will benefit a lot. Tax credits for children will double from $1,000 to $2,000, and there is a new $500 credit for dependents who are not children. The phase out has been increased from $110,000 for a married couple to $400,000, which is sure to make more upper income folks happy with the extra cash.
9) One change that taxpayers may not feel but will slowly but surely affect their bottom line is the new way the tax brackets are adjusted for inflation. Previously the brackets were adjusted using the Consumer Price Index, and the new method to be used will be the chained CPI, which makes inflation appear lower pushing more Americans into higher brackets without them knowing it. According to the Joint Committee on Taxation, this will add more than $134 billion to the federal coffers over the next decade, all from individual taxpayers, not corporations, which are most definitely not people.
10) Last but not least: Business owners may be eligible for huge breaks. First, the top corporate rate was slashed from 35% to 21%, in the hope that the corporations would hire more people and raise wages. Well, that did not happen, as rich business owners won’t hire or add to their inventory unless they have buyers for their products or service. What they did do with the huge break was to buy back their own company stock at levels never seen before. Over 1 trillion dollars, not in the hands of working Americans https://www.cnbc.com/2018/12/18/stock-buybacks-hit-a-record-1point1-trillion-and-the-years-not-over.html . There is a new 20% deduction from income for certain type of “pass-through” entities such as partnerships, S Corps, and sole proprietorships. Be sure to check with your advisor as there are income limitations as well as limits on who can write off the deduction.
There are certainly more changes which occur on a case by case basis. Good luck filing this year please stay ahead of your filing whenever possible.
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About Stu: With more than 29 years of experience as a credentialed tax professional, Stu Steinberg brings a broad depth of knowledge to his work. Stu founded Erock Tax to help provide tax strategies to individuals, families and small businesses. He uses his CPA expertise to help each client navigate their long-term debt and mortgage, gaining them the best deals and rates possible. Stu is passionate about empowering his clients through education about their tax health. He is highly energetic and brings a sense of optimism, creative problem-solving and a deep level of commitment to every Erock client.
