Tax Reform — the Tax Cuts and Jobs Act (the Act), is effective in 2018 with a few exceptions. In this article, Wis explains some key provisions and makes a few suggestions to save taxes this year and next year.
Look for “IMP” below, marking a number of last-minute important change’s that Congress made in Conference, that you and your tax adviser may not expect. If your tax “expert” is not up to date, consider finding a new one.
To summarize. IMP Individuals will be subject to seven new lower individual income tax brackets from 10% to 37% (see Tax Rates below). Alimony is no longer deductible by the payer or taxable to the recipient. The 0% and 15% capital gain tax rates will apply to higher incomes. Larger exemptions will apply to income subject to the alternative minimum tax (AMT) so fewer taxpayers will be subject to the AMT. The standard deduction increases from $6,350 to $12,000 for singles and $12,700 to $24,000 for married couples. Taxpayers taking itemized deductions will find that all of these deductions are limited or eliminated except charitable contributions. There is no deduction for personal exemptions. The Child tax credit is doubled.
Tax rates are shown below.
Capital Gain rates: For joint filers, the 0% capital gains rate will apply up to $77,200 taxable income; the 15% capital gains rate brackets will apply up to $479,000 and 20% will be the rate above that. These change points should be half of the above for single filers.
Alimony. The Act eliminates the deduction for alimony payments and does not require the payee receiving alimony payments to include alimony into income. This provision is effective for divorce decrees, separation agreements, and certain modifications entered into after 2018.
Personal exemptions. The Act eliminates the deduction for personal exemptions ($4,050 in 2017).
Itemized deductions will no longer phase out when Adjusted Gross Income exceeds certain amounts.
- IMP Medical expenses for 2018 and 2019 for medical expenses exceeding 7.5 percent of adjusted gross income, rising to 10 percent beginning in 2020.
- Interest on existing mortgages borrowed to buy a home. Home mortgage interest on new loans up to $750,000 on new mortgage loans to purchase a home.
- IMP Up to $10,000 in combined state and local income or property taxes
- Charitable deductions.
- State and local income and property taxes in excess of that deductible,
- Mortgage interest not used to purchase your home (HELOC’s),
- Employee deductions (miscellaneous)
- Expenses for the production of income or investments, like investment fees…
The standard deduction increases to $24,000 for joint returns and $12,000 for single filers. You can deduct the standard deduction if it is larger than deductible Itemized Deductions.
Child Tax Credit is expanded from $1,000 to $2,000.
I will be offering tax forecasts to my clients so that withholding and estimated taxes properly cover tax liability under the Act.
- Taxpayers and domestic relations lawyers must be aware of the after-tax effect of alimony.
- Prepay itemized deductions. In 2017 pay and deduct itemized deductions, particularly those that will not be deductible in 2018.
- If you expect the standard deduction will exceed your itemized deductions in 2018, prepay 2018 Itemized Deductions in 2017, such as charitable contributions.
- Pay expected 2018 Medical or Dental expenses in 2017: fees, complete checkups or any other procedure that will be needed in the next year. Remember that health insurance is deductible, including amounts paid out of social security benefits. Most drug stores will give you a total of prescriptions. All or a part of certain home improvements may be deductible if prescribed.
- Choose among sales, income and property taxes to pay as part of your $10,000 limit in 2018
- Prepay 2018 property taxes in 2017.
- Pay or prepay your state and local income taxes in 2017. Prepayment trap: State and local taxes other than property taxes that are prepaid in 2017 will be treated as paid in the year for which they are charged.
- Prepay deductible home mortgage interest. Miscellaneous Deductions (employee, tax preparation, and investment deductions) are deductible in 2017 to the extent they exceed 2% of AGI. Miscellaneous Deductions are no longer deductible in 2018-2025.
- In 2017, you may deduct miscellaneous Deductions to the extent they exceed two percent of your AGI. So, before year-end pay or prepay for job-related expenses, investment-related expenses and nonbusiness tax preparation and tax advice. For example, pay for your tax preparation right now. My advice: needed to do your job. Taxpayers with income other than wages will need to adjust estimated taxes and withholding as they go into 2018 so that they don’t end up with surprises at year end.
- Expect higher take-home pay in 2018 as employers change withholding in 2018. Adjust withholding to reflect different itemized deductions.
- Investors may need to adjust estimated taxes to reflect tax on capital gains, dividends, and interest.
- Taxpayers receiving retirement distributions will need to adjust estimated taxes.
MARRIED INDIVIDUALS FILING JOINT RETURNS
‘‘If taxable income is: The tax is:
Up to $19,050 … 10% of taxable income.
$19,050- $77,400: $1,905, plus 12% of the excess over $19,050.
$77,400 – $165,000: $8,907, plus 22% of the excess over $77,400.
$165,000-$315,000: $28,179, plus 24% of the excess over $165,000.
$315,000-$400,000: $64,179, plus 32% of the excess over $315,000.
$400,000-$600,000: $91,379, plus 35% of the excess over $400,000.
$600,000 and more: $161,379: plus 37% of the excess over $600,000.
‘‘If taxable income is: The tax is:
Up to $9,525: … 10% of taxable income.
$9,525-$38,700: . $952.50, plus 12% of the excess over $9,525.
$38,700-$82,500: $4,453.50, plus 22% of the excess over $38,700.
$82,500-$157,500: $14,089.50, plus 24% of the excess over $82,500.
$157,500-$200,000: $32,089.50, plus 32% of the excess over $157,500.
$200,000-$500,000: $45,689.50, plus 35% of the excess over $200,000.
$500,000 and more: $150,689.50, plus 37% of the excess over $500,000.