2018 Tax Reform – A few bits of information
Friends, Clients, and Colleagues-
Wanted to send a quick email regarding the tax reform law (I am using the word "law" as it is expected to be signed by the president no later than 12/21/17) as it affects everyone in some way. Even though the all of the changes are scheduled to begin in 2018, there are ways that you may be able to save on your taxes between 2017 and 2018. Based on what we do know, below are some techniques that you should consider in advance/prior to 12/31/2017. Again, this is may not be applicable to all, but may be helpful in your planning:
1. Pre-pay your 2018 property taxes due
for the 2017 tax year, if possible
Because the tax bill will cap the deduction for state and local taxes (SALT) at $10,000 starting in 2018, taxpayers who itemize their deductions and are not in AMT may want to consider prepaying their all of 2018 property taxes FOR THEIR PRINIPAL RESIDENCE AND 2ND HOMES (not necessary for any rentals) before Dec. 31, 2017. If you escrow will need to coordinate with your lender to see if they can prepay.
2. Make bigger charitable donations (2018 paid in 2017)
The new tax law will almost doubles the standard deduction to $12,000 for single people and $24,000 for married couples. That means more taxpayers will be using the standard deduction in future years and will get no benefit from charitable donations. Because of that, taxpayers may want to consider contributing more to charity (including in-kind/clothing, etc. donations to goodwill) in 2017 while they're more likely to be able to itemize their deductions.
3. Defer income until 2018
Almost all taxpayers will find themselves in a lower tax bracket in 2018 under the new tax law. For instance, married couples who earn a combined income
of $80,000 will be in a 22 percent tax bracket next year, compared with 25 percent under the current law. That creates an incentive to defer income until next year, when tax rates may be lower when possible.
Quick summary of changes scheduled in the new law for 2018:
2018 CHANGES FOR INDIVIDUAL FILERS-
1. Nearly doubles the standard deduction and eliminates personal exemptions: For single filers, the bill increases it to $12,000 from $6,350 currently; for
married couples filing jointly it increases to $24,000 from $12,700. With this increase, the personal exemptions of $4,050 will be eliminated. The net effect: The percentage of filers who choose to itemize would drop sharply, since the only reason to do so is if your deductions exceed your standard deduction.
2. Caps state and local tax deduction: The final bill will preserve the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for your state and local property taxes plus income or sales taxes.
3. Expands child tax credit: The credit would be doubled to $2,000 for children under 17.
4. Lowers cap on mortgage interest deduction: If you take out a new mortgage on a first or second home you would only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change. The bill would no longer allow a deduction for the interest on home equity loans. Currently that's allowed on loans up to $100,000.
5. Curbs who's hit by AMT: Earlier bills called for the elimination of the Alternative Minimum Tax. The final version keeps AMT, but dramatically reduces the number of filers who would be hit by it.
6. Eliminates mandate to buy health
insurance: There would no longer be a penalty for not buying insurance.
7. Alimony: The new law provides that alimony payments are not deductible by the payer and are not included in income of the recipient, and is only applicable to divorce or separation agreements executed or modified after December 31, 2018.
The new brackets for single filers:
• 10 percent on taxable income up to $9,525;
• 12 percent on taxable income between $9,525 and $38,700;
• 22 percent on taxable income between $38,700 and $82,500;
• 24 percent on taxable income between $82,500 and $157,500;
• 32 percent on taxable income between $157,500 and $200,000;
• 35 percent on taxable income between $200,000 on $500,000; and
• 37 percent on taxable income over $500,000.
The new brackets for married couple filers:
• 10 percent on taxable income up to $19,050;
• 12 percent on taxable income between $19,050 and $77,400;
• 22 percent on taxable income between $77,400 and $165,000;
• 24 percent on taxable income between $165,000 and $315,000;
• 32 percent on taxable income between $315,000 and $400,000;
• 35 percent on taxable income between $400,000 and $600,000; and
• 37 percent on taxable income above $600,000.
2018 CHANGES FOR BUSINESSES AND CORPORATIONS-
1. Lowers tax burden on pass-through
businesses: The tax burden on owners, partners and shareholders of S-corporations, LLCs and partnerships -- who pay their share of the business' taxes through their individual tax returns -- would be lowered by a 20% deduction. The 20% deduction would be prohibited for anyone in a service/consulting business -- unless their taxable income is less than $315,000 if married ($157,500 if single).
2. Slashes corporate rate: The bill cuts the corporate rate to 21% from 35%, starting next year. We’ll be reviewing all of our business client’s structure to determine if a change of entity is appropriate. Even at the 21% rate, it still appears that S corps and
Partnerships will have a lower top marginal rate due to the benefit of a single level of tax.