Tax change, that is. My last post went through the basics of your tax return. I want to stick with the tax topic for one more week to give you a quick guide to understanding how the new tax laws will impact your 2018 tax return. Remember, knowledge is power! (Note: this is a very high-level overview. As with all things tax, there are “if, and’s, and but’s” to everything. This is simply to help you identify questions you should be discussing with your tax advisor.)
Rates – for married filing joint taxpayers, the rates are lower for 2018 than for 2017 at all but the lowest (10%) bracket. The amount of the rate decrease varies by income level so take a look at the rate tables to see what has happened to your rate.
Income – yep it’s still taxable – no change to the “normal” items like wages, dividends, capital gains, etc. The only “common” change is in relation to alimony received so make sure you talk to your tax advisor if you are divorcing. This provision relates to divorce agreements after 2018.
Adjustments – there were not a lot of changes in this area but a couple worth noting:
• Alimony paid will no longer be an adjustment for agreements after 2018.
• Domestic production activities deduction is no longer available. See line 35 of your 1040 to
|Area||2017 & Prior||2018 to 2025|
|Medical Expenses||> 10% of AGI is deductible||> 7.5% of AGI is deductible (for 2018-2019)|
|SALT – State & Local Taxes||Unlimited||Limited to $10k total (that’s state taxes + property taxes)|
|Mortgage Interest||Acquisition debt limited to $1.1 million in order for interest to be deductible||Acquisition debt limited to $750k – HELOC interest not deductible|
|Gifts to Charity||Limited to 50% of AGI||Increased to 60% of AGI|
|Casualty & Theft Losses||> 10% of income deductible||No deduction|
|Job & Misc Deductions||> 2% of AGI is deductible||No deduction (this is your tax prep fee & investment management fee and well as unreimbursed job expenses)|
|Limitation on itemized deductions||Itemized deductions limited for higher income levels||Repealed – no limitation|
Standard Deduction – doubled. Look at line 40 of your 2017 tax return. If it is less than $24,000 for married filing jointly, you won’t need to itemize for 2018 (assuming no changes in these areas). That makes some of the Itemized deduction changes/limitations mentioned above meaningless. This is the big area to consider as you are looking at your tax situation for 2018.
20% Deduction for “qualified business income” from certain “flow-through” entities and sole proprietorships – this relates to certain K-1 income from S-Corps and partnerships but also potentially from Schedule C businesses. This is an area that is quite complex and has a lot of exclusions so if you have K-1 income, definitely discuss this with your tax advisor to see if you will qualify, and if so, what the impact will be.
Personal Exemptions – gone. Ouch, the $4,050 per dependent reduction in AGI to get to taxable income has been repealed. Look at line 42 of your 2017 tax return to see the impact. At high income levels, these phased out anyway, so it may not impact you.
There are many, many more components to this tax legislation, but I wanted to hit the high points so that you have some idea of the new rules for the tax game. It’s your money so make sure you understand the rules you are forced to play by!
To your financial (and tax) success!