New Tax Reform Laws

New Tax Reform Laws

With the new tax reform law in place, it has marked the largest overall changes to the IRS tax code we have seen in quite some time. Here are the more important elements that will be in effect 2018-2025 unless otherwise noted:

  • Tax Rates: New tax rate structure with seven brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • Capital Gains: Nothing changes with capital gains or qualified investment activity.
  • Standard Deduction: The standard deduction across the board has essentially been doubled and will be indexed by inflation as they are now.
  • Exemptions: Personal and dependent exemptions have been removed.
  • Child Tax Credits: Child (dependent children under 17) tax credits have been increased from $1,000 to $2,000 and the refundable portion of the credit is increased to $1,400. Also, the law introduces a new credit of $500 for dependents that are not qualifying children. The phaseout is also bumped up to $200,000 if single and $400,000 if married.
  • Itemized Deductions (if applicable):
    • The deduction for state and local taxes paid is now limited to $10,000 down from unlimited.
    • Mortgage interest paid is now only valid for loans used to acquire or refinance a primary or secondary residence and the overall debt outstanding is limited to $750,000 (down from $1 million). No home equity loan interest is deductible. The $750,000 limitation is only for loans obtained after December 15, 2017.
    • Miscellaneous deductions including investment advisory fees, union dues, and most importantly unreimbursed employee expenses that exceeded 2% of your adjusted gross income have all been removed.
    • Medical expenses are deductible to the extent they exceed 7.5% of adjusted gross income down from 10%.
    • Casualty and theft losses have been removed except if declared a federal disaster.
    • The overall limitation on itemized deductions that was in place has now been removed.
  • Moving Expenses: Moving/relocation expenses when you move for work have been removed unless you are qualified military personnel.
  • Alimony: For divorce decrees settled after 2018, alimony will not be deductible by the paying spouse and not included in income by the receiving spouse.
  • Health Care Mandate: Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
  • Estate and gift tax exemption: Effective for decedents dying (and gifts made) in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million if single, $22.4 million if married.
  • AMT: The exemption for the Alternative Minimum Tax calculation has been increased.
  • Pass-Through Deduction: New deduction for qualified business income. Starting in 2018, there is a deduction equal to 20% for all pass-through income. This includes partnerships, S-Corporations, LLCs, and sole proprietorships. Income must be made with the US. The deduction is phased out for professional service businesses such as health, law, consulting, athletics, and all financial services at around $157,500 for single filers or double that for joint filers.
  • Corporate Tax Rates: Corporate (C-Corp) tax rates were cut to a flat 21%.

As you can see from this quick summary of the major changes, the new law affects many different areas of taxation. It rearranges a good chunk of deductions and rates. More people will fall under the standard deduction, some key and commonly used credits have been increased, and overall the rates have been lowered for most. The new business deductions and rates should be good news for most individuals that conduct or are a part of a small business. If you have any questions or want to discuss the impact of the law for your particular situation, give us a call or bring any questions you have to your upcoming meeting!

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