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  • How will the Tax Cuts & Jobs Act affect your taxes in 2018?

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  • How will the Tax Cuts & Jobs Act affect your taxes in 2018?

    Happy New Tax Year!

    Public Law No: 115-97 - H.R.1 - Tax Cuts and Jobs Act of 2017 (TCJA of 2017) – this bill amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals and businesses.

    Caveats:

    1) The first major change to the Internal Revenue Code (IRC) since the Tax Reform Act of 1986

    2) Most of these changes are temporarily in effect from January 1, 2018 until December 31, 2025*

    3) These changes will affect your 2018 Federal & State Tax Returns and subsequent years

    4) No change to the educational deductions or credits

    Summary

    Overall summary, the new tax law changes are a temporarily relief measure that will affect all taxpayers depending on their current tax situation. I hope that everyone who reads this is able to understand the changes and how they will individually affect your 2018 tax return to be filed in early 2019. I professionally advise you to compare your 2017 Federal & State Tax Returns to what the new tax law changes are by using the Tax Return Calculation below (example at the end of this article).

    TAX RETURN CALCULATION

    Gross Income
    Less: Adjustments (or Deductions)
    Adjusted Gross Income (AGI)
    Less: Standard Deduction or Itemized Deduction
    Less: Exemption(s)
    Taxable Income

    Calculate: Federal Tax
    Less: Tax Credits
    Add: Other Taxes
    Less: Payments/Taxes Withheld
    Tax Refund OR Tax Due

    * TAX BRACKETS

    New Tax Law: There are still 7 tax brackets but the rates have been changed along with the taxable income ranges for the tax bracket

    Single (S) & Married Filing Separately (MFS)

    2017: Tax Rate & Taxable Income

    2018: Tax Rate & Taxable Income

    10%

    $0 to $9,325

    10%

    $0 to $9,525

    15%

    $9,325 to $37,950

    12%

    $9,525 to $38,700

    25%

    $37,950 to $91,900

    22%

    $38,700 to $82,500

    28%

    $91,900 to $191,650

    24%

    $82,500 to $157,500

    33%

    $191,650 to $416,700

    32%

    $157,500 to $200,000

    35%

    $416,700 to $418,400

    35%

    $200,000 to $500,000

    39.6%

    Over $418,400

    37%

    Over $500,000

    Married Filing Jointly (MFJ) & Qualifying Widower (QW)

    2017: Tax Rate & Taxable Income

    2018: Tax Rate & Taxable Income

    10%

    $0 to $18,650

    10%

    $0 to $19,050

    15%

    $18,650 to $75,900

    12%

    $19,050 to $77,400

    25%

    $75,900 to $153,100

    22%

    $77,400 to $165,000

    28%

    $153,100 to $233,350

    24%

    $165,000 to $315,000

    33%

    $233,350 to $416,700

    32%

    $315,000 to $400,000

    35%

    $416,700 to $470,700

    35%

    $400,000 to $600,000

    39.6%

    Over $470,700

    37%

    Over $600,000

    Head of Household (HoH)

    2017: Tax Rate & Taxable Income

    2018: Tax Rate & Taxable Income

    10%

    $0 to $13,350

    10%

    $0 to $13,600

    15%

    $13,350 to $50,800

    12%

    $13,600 to $51,800

    25%

    $50,800 to $131,200

    22%

    $51,800 to $82,500

    28%

    $131,200 to $212,500

    24%

    $82,500 to $157,500

    33%

    $212,500 to $416,700

    32%

    $157,500 to $200,000

    35%

    $416,700 to $444,500

    35%

    $200,000 to $500,000

    39.6%

    Over $444,500

    37%

    Over $500,000


    Effect: Solely based on this change above, all taxpayers will see a major decrease in their tax because the same amount of taxable income is at a lower tax bracket. The unfortunate part is that this change has to be coupled in with other changes which could mean that a taxpayer will see a small decrease or small increase depending on their tax situation.

    * PERSONAL EXEMPTION

    New Tax Law: The $4,050 personal exemption for yourself, your spouse, and each of your dependents is eliminated.

    Effect: Depending on the change in standard deduction which is determined by your filing status it will cause your taxable income to increase or decrease. Under the new tax law, all taxpayers using the standard deduction will see a net increase or decrease in their taxable income due to 1) an increase in the standard deduction and 2) a decrease in the personal exemption due to elimination.

    * STANDARD DEDUCTION

    New Tax Law: The filing status amount was doubled

    Filing Status

    2017 Standard Deduction

    2018 Standard Deduction

    Change in $

    Single/MFS

    $6,000

    $12,000

    + $6,000

    MFJ/QW

    $12,700

    $24,000

    + $11,300

    HoH

    $9,300

    $18,000

    + $8,700


    Effect: A majority of taxpayers (Single and/or Married with no dependents) will see a decrease in their tax based on several factors including a positive change in the tax rate/brackets and doubling the standard deduction. Some taxpayers (Single and/or Married with dependents) could see an increase in their tax by virtue of the difference between their increase in standard deduction and the decrease in their personal exemption.

    * MEDICAL EXPENSES

    New Tax Law: Reduces the threshold for qualifying medical expenses from 10% down to 7.5% of Adjusted Gross Income to be deductible as a Schedule A, Itemized Deduction.

    Effect: This will allow more taxpayers to take the medical expenses itemized deduction due to the fact that threshold for deducting qualifying expenses will be reduced. Under the 2017 current law, a taxpayer with $10,000 in medical expenses is lower than 10% of $120,000 in Adjustment Gross Income therefore disallowing the itemized deduction, whereas under the 2018 TCJA law the medical expenses would be allowed as an itemized deduction.

    * STATE AND LOCAL TAX (SALT) DEDUCTION

    New Tax Law: The amount of state and local income taxes (amounts you pay and reported on your W-2) as well as property taxes that you can claim as an itemized deduction is limited to $10,000 ($5,000 if filing MFS).

    Effect: This will directly affect all taxpayers that usually have an itemized deduction amount greater than the standard deduction for their filing status. In detail, no matter your filing status, your SALT deduction on Schedule A – Itemized Deductions can be no more than $10,000. The true effect of this will be felt by all taxpayers that use the itemized deductions method. On the other hand, these same taxpayers will have a doubled standard deduction which could surpass their usual itemized deduction which could lead to a greater tax benefit.

    * MORTGAGE INTEREST DEDUCTION

    New Tax Law: First or second homes purchased on or after January 1, 2018 with a loan amount greater than of $750,000 ($375,000 MFS) will no longer be able to deduct the mortgage interest as an itemized deduction.

    Effect: This will directly affect all high-income taxpayers with a mortgage that is greater than $750,000 ($375,000 MFS) and purchase on or after January 1, 2018. Only the mortgage interest of the first $750,000 of principal value can be deducted.

    * MISCELLANEOUS ITEMIZED DEDUCTIONS

    New Tax Law: Suspends usage of miscellaneous itemized deductions from January 1, 2018 until December 31, 2025. Below is a summary list:

    Political contributions

    Casualty and theft losses

    Legal expenses

    Unreimbursed employee expenses

    Tax preparation fees

    Investment expenses

    Gambling losses

    Hobby expenses

    Fees to fight the IRS

    Effect: This will directly affect all taxpayers that claim an itemized deduction using any of the miscellaneous itemized deductions.

    * ALTERNATIVE MINIMUM TAX (AMT)

    New Tax Law: The alternative minimum tax (AMT) applies to taxpayers with high economic income by setting a limit on those benefits that can significantly reduce a taxpayer’s regular tax amount to ensure that those taxpayers pay at least a minimum amount of tax. The AMT is the excess of the tentative minimum tax over the regular tax. Thus, the AMT is owed only if the tentative minimum tax is greater than the regular tax. The tentative minimum tax is figured separately from the regular tax. To compute the tentative minimum tax: taxable income, minus certain exclusions and deductions, subtract the AMT exemption amount, multiply the AMT exemption by the appropriate AMT tax rates, subtract the AMT foreign tax credit.

    The AMT exemption amount has been increase for Single taxpayers from $54,300 to $70,300 with a phase-out threshold of $500,000 & MFJ taxpayers from $84,500 to $109,400 with a phase-out threshold of $1,000,000. The increase in the AMT exemption amount is a temporary tax cut that will expire on December 31, 2025

    Effect: This temporary increase to the AMT exemption amount will directly benefit high-income taxpayers who already are subject to AMT on their most current tax return. The increase in the AMT exemption will reduce the amount of AMT and or eliminate the AMT for most high-income taxpayers, especially those on the lower end of calculated AMT.

    * CHILD TAX CREDIT

    New Tax Law: Expands the credit for MFJ taxpayers to qualify for the credit based on income along with increasing the credit. For MFJ taxpayers, earned income threshold increased from $100,000 to $400,000 qualify for the credit and the credit increased from $1,000 to $2,000.

    Effect: Many MFJ taxpayers who normally have earned income between $110,000 and $400,000 will now qualify for the credit along with the credit doubling.

    * CREDIT FOR NON-CHILD DEPENDENTS

    New Tax Law: Creates a temporary tax credit of $500 for a non-child dependent whom a taxpayer is supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability. A non-child dependent simply means a person older than the age of 17 and claimed as a dependent for tax purposes.

    Effect: All taxpayers who continued to claim their child while they are living with them or away at college, caring for an elderly parent, or caring for an adult with a disability will feel some of this relief considering the personal exemption has been suspended.

    HEALTH INSURANCE MANDATE

    New Tax Law: Eliminates the Individual Shared Responsibility tax for individuals who don’t maintain minimum health insurance.

    Effect: All taxpayers who don’t have the minimum health insurance won’t be subject to the Individual Shared Responsibility tax based on their income.

    * PASS-THROUGH BUSINESSES

    New Tax Law: Creates a 20% deduction on qualified business income for owners/partners/member of certain pass-through businesses (sole proprietorships, partnerships, LLCs, S-Corps). Service industries such as health, law, and professional services are excluded from this deduction, except if the taxpayer’s income is below $315,000 for MFJ or below $157,500 for Single.

    Effect: All product-based business owners and many service-based business owners will reap the benefits of this new tax law. Business owners that qualify for this 20% deduction on qualified income will see a large reduction in their out-of-pocket tax expense.


    Here is an example of how to implement the changes and see the effects:

    Single Taxpayer Tax Return Calculation Implementing New Tax Law Changes

    2017 Federal Tax Return

    2018 New Tax Law

    Gross Income

    $112,000

    $112,000

    Less: Adjustments (or Deductions)

    $0

    $0

    Adjusted Gross Income (AGI)

    $112,000

    $112,000

    Less: Standard or Itemized Deduction

    $20,000 (itemized - $8,000 mortgage interest & $12,000 state/local income & property taxes)

    $18,000 (itemized - $8,000 mortgage interest & $10,000 state/local income & property taxes)

    Less: Exemption(s)

    $4,050

    $0

    Taxable Income

    $87,950

    $94,000

    Calculate: Federal Tax

    $17,733

    $16,850

    Less: Tax Credits

    $0

    $0

    Add: Other Taxes

    $0

    $0

    Less: Payments/Taxes Withheld

    $18,850

    $18,850

    Tax Refund OR Tax Due

    Tax Refund $1,117

    Tax Refund $2,000

    Note: Every taxpayer’s situation is different and in order to make financial decisions for the future tax years, you must use your own tax return data while implementing the changes to see the effect.

    In the example above, the suspension of the personal exemption & cap on state/local income & property taxes caused the taxpayer's taxable income to increase, but because the tax rates and brackets were reduced, the taxpayer was able to see their tax refund increase.

    I thank you for reading and feel free to share this articles with your family, friends, and coworkers.

    If you have any questions, please feel free to send me an email info@cpacory.com.


    Cory W. Johnson, CPA | 12/27/2017