What you need to know about the 2018 Tax Changes

Introduction

In the span of weeks an entire overhaul of the US Tax code took place. The last major tax return took place in 1986 enacted by President Reagan. That large of a reform only passed because of strong support by both parties, and months of changes and adjustments.

With that in mind the 2018 update was rushed and a little rough around the edges. Literal last minute changes have meant that even tax agencies and educational associations haven't figured out the nitty-gritty details yet. In the meantime Kolodij Tax has put together a summary on the 2018 Tax Changes. 

Tax Brackets Changed

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The Standard Deduction Doubled 

2017: Single $6,350     /   MFJ $12,700
2018: Single $12,000    /   MFJ $24,000


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Personal Exemptions are a thing of the Past

2017= $4,050 /  2018 =  $0

 


Tax Deductions Changed

 * HELOC is still deductible if used for improvements to your home or to purchase a rental property   *Tax preparation fees are still deducitble as a business expense

* HELOC is still deductible if used for improvements to your home or to purchase a rental property 

*Tax preparation fees are still deducitble as a business expense


Pass Through Entities will receive a 20% Deduction 

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The Basics:

After reducing the C-Corp Tax Rate to 21%, something had to be done to benefit pass through entities as well. Rather than setting lower rates the solution was to enact a 20% Deduction on Qualified Business Income (QBI). 

What does Qualified Business Income Include? 

QBI includes all ordinary business income, Including that from REITs, and does NOT include a S-Corp Shareholder's reasonable compensation, Guaranteed payments, or, to the extent of regulations, payments to a partner for acting in a capacity other than that of partner. 

What other limitations is the 20% deduction subject to? 

Special Service or Trade Businesses (Health, law, accounting, financial, accounting) face a phaseout of the deduction for those with taxable income over $157,500 for a single filer or $315,000 for Married filer. 

These businesses also face a limitation on the deduction of 50% of W-2 wages paid. 

 

 


Other Changes that may Impact you

 

C-Corps Receive a flat Tax Rate of 21% 

529 Savings plans now open to more expenses

Child tax credit doubles from $1,000 to $2,000

Health Insurance mandate repealed as of 2019

Section 179 limits expanded 

First year bonus depreciation Expense doubled

Domestic Production Activity Deduction repealed 

1031 Exchanges disallowed for personal property- Real estate still qualifies. 


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Things to Think About....

State and Local Taxes are limited to $10,000

The combination of your combined state taxes (including property taxes) is now limited to $10,000. If you live in an area where property taxes are high, you may face this cap on your deduction. This cap ONLY applies to the deduction on your Schedule A, for your personal property. This not not apply to rental or business properties. 

Potential Solution: If you have a home office, or rent rooms in your home - A portion of your Property taxes can be reclassified as a business deduction. Which is not subject to the $10,000 limit. 

 

Mortgage Interest is now only allowed for the first $750,000 of debt

In 2017 the limitation was $1,000,000. This sounds like a very high limit- but for those in major cities the medial home price is close to $700,000. What this means is that if your home(s) cost in excess of $750,000 a comparable percentage of your interest deduction will be lost. 

 

Employing your children just got twice as good

If you have a business you should talk to your tax professional about employing your children to work for you. The reason why? You pay for your children's school, clothes, ect...right? You pay for those things with after tax income that you've paid 15-39% tax on. What if they could pay for their own things with income that they've paid 0% tax on? Pretty great right? 

Depending on your type of entity if your child is under 18 they may not need to pay any payroll taxes on their earnings. As long as the earnings are kept below their standard deduction they most likely won't have to pay income taxes on their earnings either. 

Additionally, what many parents due is fund an IRA for their children as well. So for 2017 this meant you could potentially pay each child $6,350 + $5,500 pretax into an IRA and potentially have their income not subject to tax. This means you moved just shy of $12,000 from being taxable. 

For 2018 the Standard Deduction moved up to $12,000. So now you may be able to pay your child up $17,500 and meet the same benefits as listed above. 

As with any tax strategy the details are different for any one so please discuss this option with your tax professional. 

 

Moving expense & Un-reimbursed Employee expenses Deductions are gone

Many employees face un-reimbursed expenses for work that were previously able to be taken as a tax deduction. This benefit is now gone.

If your employer requests that you relocate for work in 2018 ensure that they are paying for the move. If you pay for the move, there's no longer any tax benefit. 

If your employer requires you to supply your own tools, supplies, ect for work- there is now no tax benefit. A very common example is mechanics. Many mechanics need to purchase a few thousand dollars of tools each year. Previously they could deduct this cost on their taxes, this is no longer the case. If you fall into this category you may want to discuss the circumstances with your employer to see if a new arrangement can be met.