As you may know, there are changes that take effect beginning in 2018 under the recent major piece of tax legislation called the Tax Cuts and Jobs Act (the Act). The Act impacted tax rates for individuals and corporations as well as numerous additional areas.
One overarching thought is in these last few days it may be beneficial to increase deductions especially those related to personal return Schedule A items like the Hall income taxes, or property taxes and paying in 2017. On the other side, it may be beneficial to delay income to 2018 when the lower rates come into effect. The following items are a very high level summary of parts of the legislation that you may want to consider:
Personal tax changes
Personal tax rates have been lowered as well as the brackets modified.
The standard deduction has been doubled.
- Personal exemptions have been deleted, replaced by a higher child tax credit in applicable situations.
- Schedule A itemized deductions in the 2% category (unreimbursed employee expenses, investment advisor fees, tax preparation fees etc) have been eliminated.
Personal itemized tax deduction items
For tax years 2018 through 2025, the Act limits the aggregate deduction for state and local real property taxes; state and local personal property taxes; state and local taxes (i.e. the TN Hall Tax), and foreign, income, war profits, and excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 for a married filing couple. an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year to avoid the $10,000 aggregate limitation.
Qualified residential interest, i.e., interest on your home mortgage
Starting in 2018, the limit on qualifying acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). However, for acquisition debt incurred before Dec. 15, 2017, the higher $1,000,000 pre-Act limit applies. The higher pre-Act limit also applies to pre-Act debt refinanced in 2018 or later.
Home equity loans
And, importantly, starting in 2018, there is no longer a deduction for interest on home equity debt.
Under the Act rules, there is no deduction for alimony for the payer and alimony is not gross income to the recipient for divorces and legal separations that are executed after 2018. The new rules don’t apply to existing divorces and separations.
Business Tax Changes
Corporate income tax rate drop
Beginning with the 2018 tax year, the Act makes the corporate tax rate a flat 21%. It also eliminates the corporate alternative minimum tax.
Pass-through business income.
Another significant item is related to “pass-through” income from partnerships, S corporations and sole proprietorships. There are various exclusions and limits but the theme is a possible deduction of up to 20% of your business income, essentially lowering your taxable income. Please note this computation is a bit involved, and as noted, there are exclusions and limits that will result in varying outcomes for each situation.
As always, we are available to answer any questions you may have so please don’t hesitate to contact us.