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Tax Cut and Jobs Act

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The Tax Cut and Jobs Act was passed by Congress and signed into law by President Trump in December. How will the new changes impact you? Highlights from the new bill are below.

Please use the information as a general guide to discuss with your CPA- each of these items has exemptions and details that are too numerous to include in this brief update.

Tax rates

From 2018 through 2025, the new law keeps seven tax brackets, but six are at lower rates. The new rates start at 10 percent and rise to 12, 22, 24, 32, 35 and 37 percent.

The 2018 tax brackets are:

Single Joint Head of
10% tax bracket  $0 – $9,525 $0 – $19,050 $0 – $13,600
Beginning of 12% bracket $9,526 $19,051 $13,601
Beginning of 22% bracket $38,701 $77,401 $51,801
Beginning of 24% bracket $82,501 $165,001 $82,501
Beginning of 32% bracket $157,501 $315,001 $157,501
Beginning of 35% bracket $200,001 $400,001 $200,001
Beginning of 37% bracket $500,001 $600,001 $500,001

No change in taxes on long-term capital gains and dividends

The law retains the existing 0%, 15% and 20% tax rates on long-term capital gains and dividends.

For 2018, the rate brackets are:

Single Joint Head of
0% tax bracket  $0 – $38,599  $0 – $77,199 $0 – $51,699
Beginning of 15% bracket $38,600 $77,200 $51,700
Beginning of 20% bracket $425,800 $479,000 $452,400

401 (k) plans

No changes to pre-tax limit for tax-deferrals for contributions to 401(k)s and individual retirement accounts.

Pass-Through Entities

Pass-Through Entities include small businesses such as a sole proprietorships, limited liability companies and S Corporations. These businesses do not pay corporate income tax, rather profits are reported on the business owners’ personal tax return.

The bill gives businesses a 20 percent deduction for the first $157,500 in income for singles, and $315,000 if filing jointly. The deduction phases out for those with income over $207,500 (singles) and $415,000 (joint filers).

Corporate tax rate

The corporate tax rate is lowered from 35 to 21 percent.

Estate tax

The bill maintains the current federal estate tax at 40 percent.  However, the exemption levels almost doubles from $5.49 million to $11 million for individuals, and $22 million for married couples.

Alternative Minimum Tax

The AMT is eliminated for corporations, but keeps it for individuals. Exemptions are increased to $500,000 for singles and $1 million for couples.

Mortgage deduction

Maintains the mortgage deduction for existing mortgages and for newly purchased homes up to $1 million (or $500,000 if married filing separately).

Mortgage deductions will be capped at $750,000 (or $375,000 if you use married filing separate status) for new homes.

The law ends a deduction for home equity loans.

No change in home sale gain exclusion rules

The law preserves the tax break that allows you to exclude from federal income taxation up to $250,000 of gain from a qualified home sale, or $500,000 if you are a married joint-filer.

Charitable Deduction

Increases the maximum taxpayers can donate to charities in cash from 50% to 60% of adjusted gross income. The downside is that less people are expected to itemized deductions, therefore potentially reducing charitable contributions.

State and Local Tax Deductions

Deductions are limited to $10,000 ($5,000 if filing as a single) for state and local income, and property taxes. Foreign real property taxes can no longer be deducted. You can still choose to deduct state and local sales taxes or state and local income taxes.

Standard Deductions and Personal Exemptions

Standard deductions almost double, but personal and dependent exemptions are eliminated.

The 2018 standard deduction amounts are:

  • $12,000 for singles (up from $6,350 for 2017)
  • $24,000 for joint-filing married couples (up from $12,700)
  • $18,000 for heads of households (up from $9,350)

Additional standard deduction amounts for the elderly and blind are still allowed.

Child tax credit

The child tax credit has increased by $1,000. Taxpayers can claim a $2,000 credit for each qualifying child under the age of 17. The tax credit is refundable up to $1,400, meaning it can be collected even if no federal income tax is owed. In addition, a new $500 nonrefundable credit is allowed for qualified non-child dependents.

Medical expense deductions

Taxpayers are able to deduct medical expenses that exceed 7.5 percent of their adjusted gross income (AGI) for 2017 and 2018.

529 college savings plans

The new bill allows use of 529 college savings plans to pay for K-12 education. Previously, 529 plans could be used only to cover costs for college. The qualified use of 529 accounts will allow withdrawals for public, private or religious schools. Home schooling families are also allowed to use 529 funds towards educational expenses.  The withdrawal limit is $10,000 per year, per child.

Preserved Tax Breaks:

  • Adoption expenses
  • The tax credit for qualified plug-in electric vehicles
  • Student loan interest deduction
  • Tuition waivers that are received by graduate students will remain tax free

Starting in 2018:

  • Deductions for moving expenses and most miscellaneous itemized expenses are eliminated.
  • Itemized deductions for personal casualty and theft losses are eliminated, except for personal casualty losses incurred in a federally-declared disaster.

Starting in 2019:

  • The new legislation eliminates the Affordable Care Act’s individual mandate.
  • You will no longer be able to deduct alimony payments if they are required by a divorce agreement entered into after 12/31/18. Recipients of nondeductible payments won’t have to include them in taxable income.




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