Are you ready for the 2018 tax act changes?
Major tax law changes are capturing the headlines lately, and with good reason. Early proposals from the House and Senate varied widely but were reconciled in December 2017. Soon after, the Tax Cuts and Jobs Act was signed into law. There's only one thing left for you to do now: start preparing for 2018 and beyond.
Be proactive: Understand the upcoming tax changes
There's a pretty good chance you'll be affected by more than one change to come out of this new act. To help you get a better understanding of what major areas of the tax code have been altered, consider the following:
Individual tax rate brackets
Status: The new act retains seven brackets, but at reduced rates: 10, 12, 22, 24, 32, 35 and 37 percent. The individual income brackets are also expanded to expose more income to lower rates. And the marriage penalty is eliminated for all except the highest earners who are in the top two brackets. The income thresholds for singles are exactly half of thresholds for married couples.
What that means: It's important to understand the concept of marginal tax and try to manage your income to be tax-efficient. Remember, our progressive tax system still means your first dollar of income may be taxed at a lower rate than your last dollar of income. So with lower rates and expanded brackets, more of your income may fall into a lower tax bracket. You may need to adjust your federal tax withholding with your employer to keep more of your money throughout the year. This is usually a better alternative than receiving a large refund from your tax return.
Status: Some deductions are expanded and many are eliminated. For instance, the standard deduction nearly doubled for taxpayers and the personal exemption was eliminated. To help cover the cost of this lost revenue, the act makes significant changes to itemized deductions.
State and local tax deductions are limited to $10,000 total for all property, income and sales taxes. And mortgage interest will be deductible only for new acquisition indebtedness of no more than $750,000 (existing homeowners are unaffected by the cap). Home equity loan interest is eliminated, casualty theft losses are curtailed and many miscellaneous deductions are no longer available.
What that means: While changes to itemized deductions could mean you no longer need to keep track of as many expenses, do not stop collecting receipts. Even if the federal government canceled some deductions, the states may keep or add similar deductions in their tax laws.
Pass-through entity tax rates
Status: The new act reduces the taxable income of pass-through entities. This includes owners of entities such as S corporations, partnerships and sole proprietorships. Most will see their income tax lowered with a new 20 percent income reduction calculation.
What that means: If you own a business, your income tax could decrease in 2018. After a review, you may consider switching business structures to benefit from the new tax rules. It's critical to understand these changes and what constitutes your business income (with or without wages) to choose the best tax treatment for your business.
Status: The new act doubles the estate tax exemption, from $5.6 million per individual to $11.2 million. Estate taxes will apply to even fewer people now.
What that means: Your estate may be able to avoid being taxed under the new act. It also offers opportunities to adjust your estate and wealth transfer strategies. But be careful, state estate tax rules are not impacted by this change.
This is only a small snapshot of the many changes in the new act. Give us a call and we can help make sure you're in the most effective tax position for your situation.