Tax reform is on everyone’s mind as 2017 tax filing season and 2018 tax planning season are here. Your tax advisors at HORNE have been studying the new law extensively, and we will continue to do so as the IRS offers more clarity through regulations in the coming months.
First, we want you to know that the vast majority of the new rules do not affect your 2017 returns. However, many of these changes offer tax planning opportunities for 2018 and beyond. While a newsletter is no substitute for a consultation with your tax specialist, here is a sampling of things you should be aware of:
The standard deduction has doubled. It is now $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly. This could affect your choice of itemizing deductions or taking the standard deduction and careful planning could maximize the impact
Personal exemptions have been repealed. The increased child tax credit ($2,000) could make up for eliminated deduction for many taxpayers. Those in alternative minimum tax have not benefited from these exemptions in the past.
The alternative minimum tax on individuals was retained in the law. However, there are higher exemptions and the phase-out of the exemption has increased. This means fewer taxpayers should be hit with the tax.
There is now a $10,000 deduction limit on all of a filer’s state and local taxes, including property taxes. This new limit could have a significant impact on the itemizing vs. standard deduction choice for many taxpayers, especially those high income earners in high-tax states.
Account holders may now use up to $10,000 per year per student for elementary or secondary tuition at public, private, or religious schools.
If a new job requires you to move to a different location, you can no longer deduct moving expenses. (You could, however, ask your new employer for reimbursement.)
Alimony paid after December 31, 2018 is no longer deductible, or includable in income.
Miscellaneous itemized deductions subject to the 2% adjusted gross income limitation have been eliminated. That includes items such as investment management fees, tax prep fees and unreimbursed employee business expenses.
There are many nuances to this part of the law, but essentially interest on newly purchased principal (and secondary) residences is limited to $750,000 of indebtedness. Interest on home equity loans is no longer allowed. Interest on a home equity line used to refinance acquisition debt does qualify for the deduction.
The deduction was preserved with an increase in the adjusted gross income limitation from 50% to 60% on cash contributions. As with many other of these changes, careful planning can maximize the impact to you. Additionally, the 3% adjusted gross income limitation on all itemized deductions (Pease Limitation) was eliminated. This makes the impact of this change even more beneficial for benevolent taxpayers.
For both 2017 and 2018, you can deduct medical expenses in excess of 7.5% of your adjusted gross income. That goes back up to 10% in 2019.
The brackets have been expanded and tax rates for individuals have decreased, beginning in 2018. Even though the law encompasses many moving parts, if your income is the same as last year, you could indeed be paying lower taxes.
There are no changes to these regulations at this time. Rates on these remain the same. The Net Investment Income tax at 3.9% also remains.
The law provided a large amount of change and this listing does not contain all the tax changes for 2018. And certainly, everyone’s tax situation is individual to them and specific to the current tax year. Tax planning is a continual process, not a one-time event. Based on what you’ve just read, what do you need to consider in your 2018 tax strategy?
As your tax advisors, we will be studying the development of these changes and we will continue to keep you informed, both here and in our individual consultations with you. We remain fully committed to guiding you toward maximum efficiency in your tax and financial planning. Reach out to us and let us assist you with your planning. With change comes opportunity!