2018 Tax Update

As in prior years, we are incorporating our tax update as part of our website instead of a separate mailing.

President Trump, when he was on the campaign trail, promised that he would push for tax reform legislation.  On December 22, 2017, he signed the Tax Cuts and Jobs Act into law, the first major tax reform in 31 years.  The new law makes many changes to the tax code.  Every taxpayer is impacted.  A highlight of the changes follows:

  1. The tax brackets and tax rates have changed.The 10% bracket remains unchanged, while the 15% bracket declines to 12%, the 25% to 22%, the 28% to 24%, the 33% to 32%, the 35% holds steady, and the 39.6% slips to 37%.The thresholds are modestly adjusted above the new 22% bracket.

  2. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filers, reducing the incentive to itemize and simplifying for some taxpayers.  Taxpayers over 65 receive an additional $1,300 in standard deduction as well.

  3. The $4,150 personal exemption is eliminated, and the $1,000 child tax credit doubles to $2,000.In general, rules for charitable contributions remain unchanged.

  4. Those in high-tax states could see the biggest hit, as there will be a $10,000 cap on state, local and property tax deductions.

  5. For investors, the preferential treatment for long-term capital gains and dividends remains intact, as is generally the case for retirement accounts.One important change – the new tax law repeals rules that allow for recharacterizations of Roth conversions back into traditional IRAs.Once you convert into a Roth, there’s no going back.

  6. The 3.8% Medicare surtax on investment income for high-income taxpayers was retained.

  7. The AMT for individuals was not repealed, but exemptions have been widened.

  8. The estate tax survived, but the exemption will double form $5.6 million to $11.2 million, and $11.2 million to $22.4 million for couples.

  9. The new tax bill also repeals the Obamacare mandate that requires all individuals to obtain health insurance.It becomes effective 2019.

  10. Home mortgage interest is limited to interest on up to $750,000 ($375,000 for married taxpayers filing separately) of acquisition indebtedness and the deduction for interest on home equity indebtedness is suspended. The new lower limit doesn’t apply to acquisition indebtedness incurred before December 15, 2017.

  11. The threshold for medical expense deductions is lowered to 7.5% of adjusted gross income (from 10%) for tax years 2017 and 2018.

  12. Personal casualty losses are not allowed unless the losses were suffered in a federally declared disaster area.

  13. No charitable contribution deduction for amounts paid for college athletic seating rights.

  14. For any divorce or separation agreement executed after December 31, 2018 (or executed on or before December 31, 2018 but modified later if the modification expressly provides that the Act rules apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.

  15. Deduction for miscellaneous itemized deductions subject to the 2%-of-AGI floor are suspended.  Miscellaneous itemized deductions lost because of the new law include employee business expenses, investment advisor fees, union dues, and tax preparation fees.

  16. Exclusion for moving expense reimbursements are suspended.The moving expenses deduction is also suspended.

  17. The new tax reform law modifies qualified tuition programs - 529 plans.  Funds (up to $10,000) in the 529 plan can now be used to pay for grades K to 12 private school tuition.  Be careful though, as not every state has conformed to the new law.  If the taxpayer is a resident of a nonconforming state, the 529 distribution used for qualified K to 12 private school tuition would be tax free federal income tax purposes but taxable for state income tax purposes.  If the taxpayer is a resident of a state that has conformed to the new law, the 529 distribution used for qualified K to 12 private school tuition would be tax free for both federal and state income tax purposes.  The American Opportunity and Lifetime Learning credits continue to be available.

  18. For property placed in service in tax years beginning after December 31, 2017, the maximum amount a taxpayer may expense under Sec. 179 is increased to $1 million.

  19. And for businesses: Given that the 21% corporate tax rate applies only to C-corps, there will be a 20% deduction for pass-through entities, such as S-corps, partnerships, LLCs, and sole proprietorships.I believe this will be a welcome benefit for many business owners, but complex rules may limit the pass-through for some entities.  If you feel you may be eligible, please call our office so we can discuss your specific situation.

Remember the Tax Bill was over 500 pages.  This is just a list of some of the provisions included in the bill.  You should be sure to call our office to discuss specifically how the tax law will impact you.

Taxpayers with financial interests outside of the USA, must be careful to follow the somewhat intricate tax reporting rules with respect to these investments and holdings.  A person with a financial interest in or signature authority over one or more accounts in a foreign country has historically filed, at the very least, a FinCEN 114 form if the aggregate value of all foreign accounts exceeded $10,000 at any time during the year.  This was commonly referred to as an FBAR and is due April 15, 2019 and it must be filed electronically.  The initial due date can be extended for a six month period to October 15, 2019.  For larger foreign account balances and certain foreign trust accounts, there are additional forms that need to be filed, some of which need to be attached to your current federal income tax return.  The penalty for failure to file these forms or make the appropriate disclosures are very large, so be sure that you are very careful in this area.  Be sure to let us know of any foreign accounts that you have regardless of whether they generate any income when you send in your tax information.

As State tax rates have continued to rise, taxpayers owning multiple homes have explored changing their residence for tax purposes to reduce their state tax liability.  The states are getting more aggressive in challenging taxpayers who don’t follow all the rules to effectively change their tax residence.  Please call our office if you are considering changing your residence for tax purposes.

Taxpayers who are 70 1/2 or older may want to consider funding their charitable giving desires wiht qualified charitable distributions from their IRA.  An individual 70 1/2 or older may distribute up to $100,000 tax free from his or her IRA to certain charitable organizations without including the distribution in gross income.  A qualified charitable distribution must be made directly by the trustee to a 50-percent organization, but not a supporting organization or a donor advised fund.  The entire distribution must otherwise be deductible as a charitable contribution, disregarding the percentage limitations, even though the individual cannot claim the charitable deduction for the donation. 

If you have any questions about the information included in this update, about your 2018 tax return, or about a transaction you are considering for 2019, please call our office so we can discuss your specific situation.