By Skyline On Friday, January 12 th, 2018 · In

FIELD NOTE: JANUARY 2018

2018 TAX UPDATE: TAX CUTS & JOBS ACT

On December 22nd President Trump signed into law the Tax Cuts and Jobs Act.

While not as subversive as Trump’s many tax proposals touted from the campaign trail, the TCJA does make sweeping changes to the seven income tax brackets, itemized deductions, and new deductions for pass-through entities. The final result? Depending on filing status and income, tax savings will be afforded to some while a greater tax burden will affect others.

2017 vs. 2018 Tax Brackets

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2018 Tax Brackets

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Multiple itemized deductions (as seen on Schedule A) have been eliminated or restricted for 2018, with two exceptions; a temporary expansion of medical expense deductions and increased charitable contribution limits. Schedule A restrictions include a $10,000 deduction cap on combined state and local taxes, and elimination of job expenses, moving expenses, and tax preparation. While the hotly discussed mortgage interest deduction did not disappear, it was reduced to the first $750,000 of principal.

The following changes to itemized deductions have generated in an anemic Schedule A:

Medical and Dental Expenses

Medical and dental expenses are one of a few items on Schedule A that will be increased; a temporary expansion will be instituted for 2018 and retroactively for 2017. The 10% of AGI floor will be reduced to 7.5%, then reinstated at 10% starting 2019.

Home Mortgage Interest

The hotly debated mortgage interest deduction did not disappear, but was instead capped at $750,000 ($375,000 for married filing separately). Any mortgages taken out before December 15th will still be subject to the prior $1,000,000 cap. The resulting affects on home values will largely depend on location.

Casualty and Theft Losses

All casualty deductions now exclusively apply to FEMA declared disasters. See a full list of qualifying disasters on the FEMA website.

State and Local Taxes (S.A.L.T.)

A $10,000 cap has been placed on aggregate state and local sales, income, and property tax deductions ($5,000 for married filing separately). Changes to SALT deductions will not affect Schedule C, Schedule E, or Schedule F deductions.

Charitable Donations

While the charitable contribution floor for cash donations is increased from 50% to 60% of AGI, a likely decrease in taxpayers itemizing deductions still has some non-profits concerned. Notably, tax incentives remain for donating appreciated stock.

Additional Deductions

All itemized deductions subject to the 2% of AGI floor are eliminated in 2018. These deductions include the following: moving expenses (except for active members of the military), investment management fees, tax preparation fees, un-reimbursed job expenses, and various hobby expenses. 

Other notable changes include an increased standard deduction and 20% deduction for pass-through entities.

Standard Deduction

A larger standard deduction has consolidated the personal exemption and standard deduction at $12,000 for individuals and $24,000 for married couples. The resulting increase in deductions (from 2017) of $1,600 for individuals and $3,200 for married filing joint will encourage taxpayers to forego itemizing deductions.

However, this net savings may not apply to families of three or more; 2018 will see the elimination of the $4,050 exemption per family member, but the Child Tax Credit will double to $2,000. This will likely amount to increased taxes for families earning $400,000 or more, but benefit those below. Skyline suggests speaking with a CPA for more details.

Pass-Through Entities

Sole proprietorships, limited liability companies, partnerships, and S corporations benefit from a 20% deduction of their pass-through income, however multiple restrictions apply. Namely, service businesses are excluded and income thresholds are set at $157,500 for individuals and $315,000 for married filing jointly.

Estate Tax

The TCJA doubled the estate exemption to $11.2 million for individuals and $22.4 million for married couples (applicable only to individuals who pass after December 31st, 2017), which will only affect an estimated 5,000 estates per year.

Contact a Skyline advisor to learn how the TCJA will affect your 2018 taxes.

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