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Personal Tax Changes Effective in 2018

Re: 2017 Tax Reform Tax Cuts and Jobs Act

Individual Tax Returns (Form 1040)

TaxWorks Comments:

Our take on the legislation is that most of Taxworks clients should experience some reduction in their 2018 and forward tax liabilities.

Individual tax rates will be reduced. The new act maintains 7 tax brackets and rates are reduced for most taxpayers.

Standard Deduction amounts will be substantially increased.
Old: $6500 single : $13000 married
New:  $12000 single : $24000 married

Offsetting the above is the fact that the Personal Exemption Deduction is eliminated. (Currently $ 4050 per family member).

For the most part Capital Gains rates remain the same.

S  Corps and Partnerships
Many of you own businesses or have business interests in S Corps or Partnerships. Right now you are taxed at your personal income tax rates on income earned from these "flow through" entities. Under the new law you could be allowed an important deduction of 20% from this income thereby reducing your personal tax bill.

However:
1) For service business such as lawyers, dentists, accountants and consultants where income exceeds certain thresholds  you could lose the deduction altogether.
2) For other businesses (say manufacturing, engineering, and architecture) the income thresholds appear to be more favorable and the ability to capture the deduction somewhat easier.

There are new limitations on Business Losses that can be deducted in any one year.

Casualty Losses (fire theft etc.) are no longer deductible unless related to federally declared disaster areas.

The Child Tax Credit is increased from $1000 to $2000 for qualified taxpayers.

State and Local itemized tax deduction which in the past was not limited is now limited to $10,000 married filing joint or $5000 for individuals .

For new mortgages secured in 2018 and thereafter, interest on the first $750,000 will be deductible. Interest on Home Equity loans  will no longer be deductible.( Currently interest on $1 million in debt  plus  interest on up to $100,000 in home equity loans is allowed).

Charitable donation cash contribution limits have been increased from 50% of adjusted gross income to 60%.

For divorce decrees executed after 12/31/2018 alimony payments will no longer be deductible by the payer nor is the associated  income reportable by the payee.

Miscellaneous itemized deductions (most often unreimbursed employment costs, job search costs, union dues, investment expenses,  job education costs ) are no longer deductible.

Moving Expense Costs will no longer deductible.

For 2017 and 2018 the medical expenses threshold is reduced to 7.5%. (For most taxpayers it is now 10%).

Repeal of Individual Mandate
Under Obamacare a taxpayer that was not covered by a health plan providing minimal essential coverage was penalized for every month he or she was not covered. After December 31 2018 taxpayers will no longer be penalized for not having such coverage.

529 College Savings Accounts are now expanded to include tuition for elementary or secondary public private or religious schools.

New rules will be put in place whereby a qualified employee can elect to defer income attributable to qualified stock transfers.

The current overall limitation for taxpayers whose itemized deductions exceed allowable amounts has been suspended. (PEASE LIMITATION).

Estate Taxes
Exemption amounts have been doubled to $11.2 million ($22.4 million per married couple).

Alternative Minimum Tax (AMT). Exemptions and phase out rules have been raised substantially so higher income taxpayers may  benefit from these changes.

Business Tax Changes Effective in 2018

Re: 2017 Tax Reform Tax Cuts and Jobs Act

Corporate tax rate (C Corporations) reduced to a flat 21%.

Dividends received deduction is reduced

Alternative Minimum Tax (AMT) is repealed

Section 179 100% fixed asset expensing allowance for depreciable tangible personal property used in active conduct of a trade and  certain qualified non-residential  real property has been increased to $1 million from $500,000.The definition of qualified real property has been expanded to include roofs, heating, ventilation alarm systems etc.

Bonus depreciation (currently an additional 50% in year of acquisition) is increased to 100% for qualified property place in service after September 27, 2017 and before January 1, 2023. Qualified property now includes used property.

Automobile depreciation limits are increased.

Recovery Period for Real Property Improvements is Shortened
In the past such improvements could often only be amortized over 39 years (commercial property) or 27.5 years (non-residential real property).Under new law such improvements may be amortized over 15 years.

Limitation on Interest Expense Deduction
Under the new law interest expense is limited to 30% of the company’s adjusted taxable income. An exemption to this rule applies to Corporations whose gross receipts do not exceed $25 million.

Net Operating Loss Deduction
The 2 year carryback provisions are repealed AND any NOL deduction is limited to 80% of taxable income.

The Domestic Production Activities Deduction is repealed. This will have a negative impact on the tax liabilities of many construction based industries.

Like Kind Exchanges will now limited to real property transactions.

Entertainment Expenses. These will no longer be allowed.

Cash versus Accrual Method /Inventories
C Corps (excluding personal service corporations) and certain partnerships can now use the cash method of accounting providing their gross receipts do not exceed $25 million. Previously the limit was $5 million. These same corporations need no longer account for inventories.

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