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As you already know by now, there have been comprehensive changes made overhauling our tax system with our current Administration. In fact, our three branches of government have come together and formed an agreement for a new tax plan that will take effect, January 1, 2018.
But don’t worry, when it comes to you filing your 2017 taxes, everything is still the same. You might want to learn about and plan ahead when it comes to the changes taking effect in the following years. And you can, with proper tax planning, which is where we come in. In today’s blog, we’re going to review just a few of the personal changes that can affect you after next year.
Personal Taxes
When it comes to the new tax rates, the old 7-bracket system is still in place, but six of the brackets have been lowered while the lowest income bracket is staying the same at 10%. What this means for you and your family is that you will pay fewer taxes in 2018 if your taxable income stays the same as in future years (it doesn’t take into account the changes in deductions but it does look at your taxable income and how it factors into the total tax).
Standard Deduction
This is nearly doubling for those households filing single and married filing jointly. So, households filing using a standard deduction of $6,350 (for single) and those using $12,700 (married filing jointly), you are looking at a deduction of $12,000 for single and $24,000 for married filing jointly in 2018. This was done to do away with itemizations, but it also eliminates personal exemptions, which bring us to the next item.
Personal Exemptions
Personal exemptions have been removed with the new laws. Before, you could deduct $4,050 per tax filer along with any dependents. So, if you and your spouse filed your taxes and you have no kids, you got a deduction of $8,100, while a couple with three children got a $20,250 deduction. However, the new child tax credit has been raised which will offset your loss from personal exemptions for each child.
Child Tax Credit
Here’s where you make up for the loss in personal exemptions regarding your children. The new tax overhaul doubled the amount per child, going from $1,000 to $2,000 for each child. It also increases the maximum refundable credit from $1,000 to $1,400. And, it adds a nonrefundable $500 credit for dependents who aren’t children (must meet qualifications). In addition, the income threshold was raised. This credit kicks in when the credit starts phasing out from $75,000 for single tax filers and $110,000 married filing jointly tax filers to $200,000 and $400,000 respectively. What does this mean for you? Well, it is a dollar for dollar credit which helps if you have a big family.
Mortgage Interest Deduction
This deduction is now lowered. Applying to those homes in a contract before December 15, 2017, it lowers the amount of acquisition indebtedness from 1 million to $750,000 (this only affects you if you bought a home with a loan that’s larger than $750,000). So, you won’t lose the whole deduction if your loan is bigger than $750,000, it’s just that the interest deduction will be calculated on a prorated basis.
State and Local Taxes
With the new law, your state and local taxes and property taxes will be limited to $10,000. So if you have high property tax bills or pay large state and local taxes, you are going to notice a bigger negative impact on your tax returns. Your deductions for these items will be limited beginning in 2018.
Alimony
Those divorce agreements that start after December 31, 2018, will find themselves facing the new tax changes. In the past, whoever paid Alimony could deduct this amount on their federal tax return while the spouse receiving alimony had to list it as income. Under the new changes, the deduction for the person paying alimony is eliminated, and the spouse receiving alimony doesn’t have to pay taxes on this income.
Pass-through Income Deduction
Much of the business income generated in America’s economy is known as “pass-through income” where those U.S. businesses don’t pay corporate taxes. Instead, their income passes through to their owner’s individual tax returns where the business income is taxed at the same rate that applies to personal tax returns. These businesses include sole proprietorships, limited liability companies, partnerships, and a special kind of incorporated business known as an S corporation. Under the new tax laws, individuals can deduct up to 20% of their “qualified business income” from a partnership, S Corporation, sole proprietorship or other business entities. This is the most complex change made by the TCJA and has many limitations and thresholds that can vary on a case by case basis. I highly recommend giving us a call before the year ends to see if you qualify.
Of course, these aren’t the only tax reform changes taking effect that could affect you and those you love. Our specialists are ready to help you understand the new laws and how you can prepare for them. Please give our Corporate Capital team a call at 855-371-0070 and let us take the worry out of your taxes.