TAX REFORM AND ITS IMPACT
When he was on the campaign trail, Donald Trump promised that he would push for tax reform. On December 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform bill in 31 years. The new law makes many changes to the tax code. Every taxpayer is impacted. Here are some of the changes:
Tax Rates. Tax rates are reduced. The top rate is reduced from 39.6% to 37%. Lower rates are also reduced.
Exemptions and the Child Tax Credit. The deduction for personal exemptions is eliminated. An expanded child tax credit will help make up for the loss of personal exemptions for some families. The credit is increased to $2,000 (from $1,000) for qualifying children under 17. The maximum refundable amount of the credit is $1,400. For children 17 and older and for other dependents, the credit is $500.
Standard Deduction. The new tax reform law doubles the standard deduction. The higher standard deduction ($12,000 for singles, $18,000 for heads of household, and $24,000 for married filing jointly) means that fewer taxpayers will itemize deductions.
Itemized Deductions. Itemized deductions for all state and local taxes, including property taxes, are capped at $10,000. The limit on mortgage debt for purposes of the mortgage interest deduction is reduced from $1,000,000 to $750,000 for loans made after December 15, 2017. Loans made before December 15, 2017 are grandfathered at the $1,000,000 debt limit. The interest on home equity borrowing is no longer deductible, unless the home equity loan is used to buy, build or substantially improve the taxpayer’s home that secures the loan. The threshold for medical expense deductions is lowered to 7.5% of adjusted gross income (from 10%) for tax years 2017 and 2018.
Miscellaneous Itemized Deductions subject to the 2% of adjusted gross income floor. Costs related to tax preparation services, investment fees, professional dues and unreimbursed employee business expenses such as mileage, travel, entertainment and home office expenses are no longer deductible. Personal casualty losses are not allowed unless the losses were suffered in a federally declared disaster area.
Alimony. For agreements signed in 2019 or later, the payer no longer gets a deduction for alimony and it is no longer taxable to the recipient. There is no change to the law for agreements entered into before the end of 2018.
Moving Expense. The new tax reform law eliminates the moving expense deduction and makes employer reimbursement of moving expenses taxable to employees beginning in 2018.
AMT. The new tax reform law temporarily increases the alternative minimum tax (AMT) exemption for tax years 2018 through 2025. The increase in the exemption, as well as the elimination of major tax preferences (exemptions, state taxes above $10,000 and miscellaneous itemized deductions), means that fewer people will be subject to AMT.
Education. The new tax reform law modifies qualified tuition programs known as 529 plans. Funds in the 529 plan can now be used to pay for grades K to 12 private school tuition. The above-the-line deduction for college tuition expenses was renewed in later legislation, but only for 2017. The American Opportunity and the Lifetime learning credits continue to be available.
Roth IRA Conversions. The new tax reform law repeals the special rule permitting recharacterization of Roth IRA conversions. A conversion of a traditional IRA to a Roth IRA may still be advisable, but once the conversion is made, it can’t be undone.
These are just a few of the changes included in the Tax Cuts and Jobs Act. It’s guaranteed that your 2018 taxes will be affected. The impact depends on your personal situation.
Questions we can answer for you:
• Will the new tax law help me or hurt me?
• Is my withholding enough so that I won’t
have any surprises next April 15?
• Is there anything I can do now that will
make my taxes less under the new tax reform law?
Please give us a call if you’re looking for answers.
FREDERIKSEN-CRAWFORD CPAS INC.
Tara L. Crawford, CPA Christian Frederiksen, CPA Carroll Ng, CPA