Tax Law Changes For TY 2018
Individual Tax Changes 2018 and thereafter
Tax rates: A Consumer Price Index (CPI) will be used for future indexing.
Standard deductions: The standard deduction is effectively doubled to $12,000 for single filers and $24,000 for joint filers in 2018, while the additional standard deductions for the elderly and blind are retained. Each year, the standard deduction is indexed for inflation.
Personal exemptions: Personal exemptions, including exemptions available for qualified dependent children and relatives, are repealed. Accordingly, the personal exemption phase out rule also goes away.
Charitable gift-giving: This is a relatively easy way to bolster your deductions. Unlike most itemized deductions, the write-off for charitable donations is fully preserved by the Tax Cuts & Jobs Act (TCJA) for 2018 and beyond. But many more taxpayers won’t be itemizing due to the increased standard deduction and loss or reduction of other itemized deductions.
Miscellaneous deductions: All deductions that were subject to the 2%-of-AGI threshold are gone. These include unreimbursed employee business expenses, tax preparation costs, investment account management fees, IRA custodial fees paid by the account owner, hobby expenses to the extent of hobby income, safe deposit box fees and many more. But other miscellaneous write-offs not subject to the 2%-of-AGI threshold survive, such as personal gambling losses to the extent of gambling winnings that are reported on the first page of the 1040. The phase-out of itemized deductions for upper-incomers is scrapped.
State and local taxes: In a controversial provision, the TCJA limits the deduction for state and local income taxes (SALT) to $10,000 annually for any combination of state and local property taxes, state and local income taxes, or sales taxes. Your tax benefit for these payments may be either watered down or nonexistent depending on your circumstances. Note: You will not be able to deduct state and local taxes if you are subject to the Alternative Minimum Tax.
Mortgage interest: Although deductions for prior debt are grandfathered, the new law limits the mortgage interest deduction to interest paid on the first $750,000 of acquisition debt, down from $1 million. It also eliminates deductions for interest paid on home equity debt. Although mortgage interest is generally still deductible on existing loans in 2018 and after, you won’t get any tax benefit if you claim the standard deduction rather than itemizing. Interest on margin loans can still be written off if used for investments. Investment interest paid is deductible on Schedule A up to the amount of net investment income reported.
Medical expenses: While other itemized deductions are eliminated or scaled back, the deduction for medical expenses is temporarily improved. You must be able to get over a certain percentage of AGI before you can start using medical expenses.
Alternative minimum tax: The alternative minimum tax (AMT) system is retained, but exemption amounts, as well as the thresholds for phasing out exemptions, are significantly increased. In addition, these figures will be indexed for inflation in future years.
Estate tax: The federal estate tax exemption was doubled, resulting in an inflation-indexed exemption of $11.18 million per person in 2018. This amount will continue to be indexed for inflation in future years.
Section 529 plans: The list of qualified expenses for Section 529 plans is expanded to include tuition at an elementary or secondary public, private or religious school, plus home schooling expenses, for up to $10,000 per year.
Health insurance: The new law repeals the health insurance mandate for individuals established by the ACA. This change took effect in 2019.
Business Tax Provisions
Unlike the individual tax provisions in the new law, the key provisions relating to businesses are generally permanent. Following is a brief rundown:
Corporate tax rates: The corporate tax rate structure, which features a top rate of 35%, is replaced with a flat 21% rate.
Pass-through entities: Under the new law, pass-through entities -- such as partnerships, S corporations, limited liability companies (LLCs) and sole proprietors -- can claim a 20% deduction on earnings on the personal tax return, subject to special rules and restrictions. The deduction is not available to higher-income personal service providers with personal taxable income more than $415,000 for married couples and $207,500 for single taxpayers (amounts indexed for inflation annually). Ask us for some examples if this applies to you.
Section 179 deduction: The new law doubles the maximum Section 179 “expensing” allowance from $500,000 to $1 million. It also increases the phase out threshold for Section 179 deductions from $2 million to $2.5 million. These amounts will increase slightly in future years due to inflation.
Bonus depreciation: Similarly, the new law doubles the first-year “bonus depreciation deduction” from 50% to 100% through December 31, 2022. Afterwards, the percentage will phase out by 20 percentage points each year until the end of 2026.
Luxury car rules: The new law raises the caps on depreciation deductions allowed under the “luxury car” rules for passenger vehicles for which bonus depreciation is not claimed.
Corporate AMT: Unlike the individual AMT, the corporate version of the AMT is completely repealed.
Interest deductions: Deductions for business interest expenses are capped at 30% of AGI, subject to certain special rules. However, a small business with average gross receipts of $25 million or less for the past three years is exempt.
Entertainment deductions: The deduction for business-related entertainment such as sporting event tickets or golfing is repealed. Businesses can still generally deduct 50% of the cost of qualified meals.
The notice indicates that meals are still 50 percent deductible if they meet all of the following requirements:
Retirement Contribution Limits Hiked
The IRS has increased the contribution limits for various retirement accounts in 2019 and thereafter will be inflation adjusted.
Source: CPA Practice Advisor
Source: The Associated Press
Tax rates: A Consumer Price Index (CPI) will be used for future indexing.
Standard deductions: The standard deduction is effectively doubled to $12,000 for single filers and $24,000 for joint filers in 2018, while the additional standard deductions for the elderly and blind are retained. Each year, the standard deduction is indexed for inflation.
Personal exemptions: Personal exemptions, including exemptions available for qualified dependent children and relatives, are repealed. Accordingly, the personal exemption phase out rule also goes away.
Charitable gift-giving: This is a relatively easy way to bolster your deductions. Unlike most itemized deductions, the write-off for charitable donations is fully preserved by the Tax Cuts & Jobs Act (TCJA) for 2018 and beyond. But many more taxpayers won’t be itemizing due to the increased standard deduction and loss or reduction of other itemized deductions.
Miscellaneous deductions: All deductions that were subject to the 2%-of-AGI threshold are gone. These include unreimbursed employee business expenses, tax preparation costs, investment account management fees, IRA custodial fees paid by the account owner, hobby expenses to the extent of hobby income, safe deposit box fees and many more. But other miscellaneous write-offs not subject to the 2%-of-AGI threshold survive, such as personal gambling losses to the extent of gambling winnings that are reported on the first page of the 1040. The phase-out of itemized deductions for upper-incomers is scrapped.
State and local taxes: In a controversial provision, the TCJA limits the deduction for state and local income taxes (SALT) to $10,000 annually for any combination of state and local property taxes, state and local income taxes, or sales taxes. Your tax benefit for these payments may be either watered down or nonexistent depending on your circumstances. Note: You will not be able to deduct state and local taxes if you are subject to the Alternative Minimum Tax.
Mortgage interest: Although deductions for prior debt are grandfathered, the new law limits the mortgage interest deduction to interest paid on the first $750,000 of acquisition debt, down from $1 million. It also eliminates deductions for interest paid on home equity debt. Although mortgage interest is generally still deductible on existing loans in 2018 and after, you won’t get any tax benefit if you claim the standard deduction rather than itemizing. Interest on margin loans can still be written off if used for investments. Investment interest paid is deductible on Schedule A up to the amount of net investment income reported.
Medical expenses: While other itemized deductions are eliminated or scaled back, the deduction for medical expenses is temporarily improved. You must be able to get over a certain percentage of AGI before you can start using medical expenses.
Alternative minimum tax: The alternative minimum tax (AMT) system is retained, but exemption amounts, as well as the thresholds for phasing out exemptions, are significantly increased. In addition, these figures will be indexed for inflation in future years.
Estate tax: The federal estate tax exemption was doubled, resulting in an inflation-indexed exemption of $11.18 million per person in 2018. This amount will continue to be indexed for inflation in future years.
Section 529 plans: The list of qualified expenses for Section 529 plans is expanded to include tuition at an elementary or secondary public, private or religious school, plus home schooling expenses, for up to $10,000 per year.
Health insurance: The new law repeals the health insurance mandate for individuals established by the ACA. This change took effect in 2019.
Business Tax Provisions
Unlike the individual tax provisions in the new law, the key provisions relating to businesses are generally permanent. Following is a brief rundown:
Corporate tax rates: The corporate tax rate structure, which features a top rate of 35%, is replaced with a flat 21% rate.
Pass-through entities: Under the new law, pass-through entities -- such as partnerships, S corporations, limited liability companies (LLCs) and sole proprietors -- can claim a 20% deduction on earnings on the personal tax return, subject to special rules and restrictions. The deduction is not available to higher-income personal service providers with personal taxable income more than $415,000 for married couples and $207,500 for single taxpayers (amounts indexed for inflation annually). Ask us for some examples if this applies to you.
Section 179 deduction: The new law doubles the maximum Section 179 “expensing” allowance from $500,000 to $1 million. It also increases the phase out threshold for Section 179 deductions from $2 million to $2.5 million. These amounts will increase slightly in future years due to inflation.
Bonus depreciation: Similarly, the new law doubles the first-year “bonus depreciation deduction” from 50% to 100% through December 31, 2022. Afterwards, the percentage will phase out by 20 percentage points each year until the end of 2026.
Luxury car rules: The new law raises the caps on depreciation deductions allowed under the “luxury car” rules for passenger vehicles for which bonus depreciation is not claimed.
Corporate AMT: Unlike the individual AMT, the corporate version of the AMT is completely repealed.
Interest deductions: Deductions for business interest expenses are capped at 30% of AGI, subject to certain special rules. However, a small business with average gross receipts of $25 million or less for the past three years is exempt.
Entertainment deductions: The deduction for business-related entertainment such as sporting event tickets or golfing is repealed. Businesses can still generally deduct 50% of the cost of qualified meals.
The notice indicates that meals are still 50 percent deductible if they meet all of the following requirements:
- The meal is an ordinary and necessary business expense under Section 162(a) paid or incurred during the taxable year.
- The meal is not lavish or extravagant under the circumstances.
- The taxpayer or an employee of the taxpayer is present when the meal is furnished.
- The meal is provided to a current customer, prospect, consultant or similar business contact.
- Any meal provided in conjunction with an entertainment activity must have a separately stated cost on the invoice/receipt. The entertainment disallowance rule cannot be circumvented by artificially inflating the cost of the meal.
Retirement Contribution Limits Hiked
The IRS has increased the contribution limits for various retirement accounts in 2019 and thereafter will be inflation adjusted.
Source: CPA Practice Advisor
Source: The Associated Press