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
The Standard Deduction Doubled
2017: Single $6,350 / MFJ $12,700
2018: Single $12,000 / MFJ $24,000
Personal Exemptions are a thing of the Past
2017= $4,050 / 2018 = $0
Tax Deductions Changed
Pass Through Entities will receive a 20% Deduction
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Health Insurance mandate repealed as of 2019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Domestic Production Activity Deduction repealed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.
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.