Big changes are going into effect in 2018… Thanks to the massive new tax legislation.
This newsletter is devoted to the new law. Most individual tax provisions are temporary. They expire after 2025.
Let’s start with individual taxes. Standard deductions nearly double – to $24,000 for couples, $12,000 for singles and $18,000 for household heads. Folks age 65 or up and blind people get $1,250 more per person ($1,550 if unmarried). Given these much higher amounts, it’s a sure bet that far fewer people with itemize. Personal exemptions for individual filers and their dependents are repealed. The popular deduction for state and local taxes is being squeezed. You can deduct any combination of residential property taxes and income or sales taxes up to a $10,000 cap. Property taxes remain fully deductible for taxpayers in a business or for-profit activity, so taxes paid on rental realty can be taken in full on Schedule E.
Several other write-offs are eliminated: Deductions for job-related moves, except for the military. All miscellaneous write-offs subject to the 2%-of-AGI threshold, including employee business expenses, brokerage and IRA fees, hobby expenses and tax return preparation costs, theft losses and alimony for post-2018 divorce decrees. Although it’s good news to recipients, who will not be taxed on alimony they receive. The charitable contribution write-off is preserved, with some changes. The medical expense deduction is enhanced. Not only have lawmakers opted to keep this popular write-off, but they’ve also temporarily lowered he AGI threshold for deducting 2017 and 2018 medical expenses on Schedule A from 10% to 7.5%.
The law keeps seven tax brackets, but with different rates and break points. For example, not only is the top individual rate lowered from 39.6% to 37%, but that rate kicks in at a higher income level. And, note that whatever new bracket you fall into, more of your taxable income will be hit with lower rates than before.
Tax rates on long-term capital gains and qualified dividends do not change. Currently, your capital gains and dividends rate depends on your tax bracket. But with the bracket changes, Congress decided to set income thresholds instead. The 0% rate will continue to apply for taxpayers with taxable income under $38,600 on single-filed returns and $77,200 on joint returns. The 20% rate starts at $425,800 for singles and $479,000 for joint filers.
Obamacare’s individual mandate is on the way out. Keep in mind the mandate continues to apply for 2018.
The child tax credit is doubled to $2,000 for each dependent under age 17, with up to $1,400 of the credit refundable to lower-income taxpayers. There’s a new $500 credit for each dependent who is not a qualifying child, including, for example, an elderly parent you take care of or a disabled adult child.
The kiddie tax is significantly revamped, so that unearned income of children under 18 is taxed at the ordinary income and capital gains rates applicable to trusts and estates, and not at their parents’ marginal tax rate, as before.
Generally, tax benefits for retirement savings haven’t been curtailed. There is an important change involving Roth IRA conversions, however. The new law bars IRA owners who convert their traditional IRAs to Roth IRAs from later undoing the conversion and recovering the income tax paid on the switch.
The 20% write-off for pass-through income. It applies to self-employed people and owners of pass-throughs such as LLCs, partnerships and S corporations that pass their income to owners for tax purposes. Many of these individuals can deduct 20% of qualified business income. As a caveat, this is one of the most complex provisions in the new law. There are lots of special rules and restrictions, most of which apply to high earners, as well as unsettled issues begging for IRS guidance.