2018 Tax Law Changes in Brief
We are very excited about the opportunities coming in 2018!
Everyone will have questions about how the new tax code will affect them and we are busy preparing to address those questions. Many of the changes are going to require technical guidance, which the IRS may not be able to address until after this tax season. In some cases, we will recommend that you schedule a mid-year review appointment to more accurately analyze the impact to your circumstances.
Individual Tax Changes
Child Tax Credit increased to $2,000 per child ($500 per dependent above 17 years old) – The conference agreement increases the child tax credit to $2,000 per qualifying child under the age of 17 (from $1,000). The maximum amount of this credit that is refundable is $1,400 per qualifying child. There is also a new $500 nonrefundable credit for qualifying dependents other than qualifying children (children in college that are still your dependent). Phase-out at $400,000 AGI for Married filers.
529 Accounts Allowed for Private School up to $10,000 per year per child – modifies section 529 plans to allow such plans to distribute up to $10,000 in expenses for tuition per year, per child, to attend a public, private or religious elementary or secondary school. This limitation applies on a per-student basis, rather than a per-account basis. Thus, under the provision, although an individual may be the designated beneficiary of multiple accounts, that individual may receive a maximum of $10,000 in distributions free of tax.
Standard Deduction Doubled to $24,000 MFJ and $12,000 Single – Personal exemption of $4,050 per person on tax return is repealed.
The limitation of itemized deductions for high income earners is repealed.
Home mortgage interest limited to interest on the first $750,000 of acquisition debt. – Mortgages acquired before 12/15/2017 the limit is still $1 million of acquisition debt.
Limitation of State tax Deduction – taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the total of State and local income tax, property taxes or sales tax, not paid or accrued in carrying on a trade or business. This does not apply to state and local taxes imposed on a business or schedule E rental property.
Charitable Deduction – Increases the charitable contribution deduction limit to 60% of Adjusted Gross Income (AGI) from 50%.
Repeal of Miscellaneous Itemized Deductions – suspends all miscellaneous itemized deductions that are subject to the two-percent floor under present law, which included:
- Job search expenses
- Investment fees and expenses
- Tax preparation fees
- Employee business expenses
- Office supplies
- Home office expenses
Alimony deduction no longer allowed – alimony and separate maintenance payments are not deductible by the payor spouse, effective for any divorce or separation instrument executed after December 31, 2018.
Sale of personal residence exclusion is still in place. Same rules apply as 2017. You can exclude up to $500,000 of gain on the sale of your personal residence if you have lived in the house for 2 out of the last 5 years.
No more back door Roth IRA’s for high income individuals.
Estate Tax – The provision doubles the estate and gift tax exemption for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. This is accomplished by increasing the basic exclusion amount from $5 million to $10 million.
Like Kind Exchange (1031) no longer applies to personal property – The provision modifies the provision providing for no recognition of gain in the case of like-kind exchanges by limiting its application to real property that is not held primarily for sale.
Tax Rates – The conference agreement follows the Senate amendment, but provides for a 21% corporate rate effective for taxable years beginning after December 31, 2017.
Pass-Through Tax Deductions – The provision allows for a 20% deduction of income on pass through income. There are certain limitations to this, but the details are very complex and we can analyze this on a case by case basis. This deduction does not include professional service pass through entities.
Luxury Car depreciation – the maximum amount of allowable depreciation for a luxury car is increased:
- YEAR 1 – from $3,160 to $10,000
- YEAR 2 – from $5,100 to $16,000
- YEAR 3 – from $3,050 to $9,600
- YEAR 4+ – from $1,875 to $5,760
Increased Expensing of Property (Bonus Depreciation) – The 50% allowance for the year placed in service is increased to 100% for qualified property placed in service after September 27, 2017. The bill includes removal of the requirement that the original use of qualified property must commence with the taxpayer (you can buy used property). “Qualified property” generally means property with a useful life of 20 years or less.
Corporate AMT is repealed.
Section 179 depreciation – The provision increases the maximum amount a taxpayer may expense under section 179 to $1,000,000, and increases the phase-out threshold amount to $2,500,000.
Simplification of Accounting Method for Small Businesses
- Cash method of accounting – The gross receipts test allows taxpayers with annual average gross receipts that do not exceed $25 million for the three prior taxable-year period (the “$25 million gross receipts test”) to use the cash method.
- Requirement to keep inventories – In addition, the provision also exempts certain taxpayers from the requirement to keep inventories. Specifically, taxpayers that meet the $25 million gross receipts test are not required to account for inventories under section 471, but rather may use a method of accounting for inventories that either (1) treats inventories as non-incidental materials and supplies, or (2) conforms to the taxpayer ‘s financial accounting treatment of inventories.
- Uniform capitalizations rules -any producer or reseller that meets the $25 million gross receipts test is exempted from the application of section 263A.
- Percentage of completion for construction contracts – contracts within this exception are those contracts for the construction or improvement of real property if the contract: (1) is expected (at the time such contract is entered into) to be completed within two years of commencement of the contract and (2) is performed by a taxpayer that (for the taxable year in which the contract was entered into) meets the $25 million gross receipts test.
There is a lot more and we will share information as we get it.