Congress passed a sweeping tax overhaul bill, the “Tax Cuts and Jobs Act” (the Act). Here is a glance how the Act could affect your 2018 taxes.

Note: Most of the individual changes expire after 2025.

Tax rates:

While the current seven-bracket structure is retained, most individual marginal tax rates will decrease by 2.6% to 4% depending on your taxable income level. The highest margin rate drops from 39.6% to 37%.

·     Under the old tax provision the top rate of 39.6% began at $480,600 for married filers and $426,700 for single filers.

·     Under the new tax provision the top rate of 37% begins at $600,000 for married filers and $500,000 for single filers.

·     The present-law maximum rates on net capital gains and qualified dividends is retained

Standard deduction:

Effective for tax years beginning after December 31, 2017, the standard deduction would nearly double to $24,000 for married filing jointly tax payers, $18,000 for head of household, and $12,000 for all other individuals.

Personal exemptions:

For tax years beginning after December 31, 2017 the deduction for personal exemptions will be eliminated through 2025.

Qualified business income deduction:

The Act introduced a 20% deduction of “qualified business income” (QBI) from pass-through income sources such as partnerships, S corporations and includes sole proprietorships. It’s worth mentioning that the 20% deduction is not allowed in computing adjusted gross income (AGI), rather is allowed as a deduction reducing taxable income.

Moving expenses deduction:

This deduction is repealed for tax years beginning after December 31, 2017.

Now let’s highlight a few changes on itemized deductions.

State and local tax deduction: The Act would allow a deduction up to an aggregated amount of $10,000 ($5,000 for taxpayers married filing separately) on State/local income taxes and property taxes.

·     Note a deduction for any 2018 tax prepayment made before December 31, 2017 would be disallowed as a deduction for tax year 2017.

Mortgage interest deduction: The deduction for mortgage interest is now limited to underlying indebtedness of up to $750,000 ($375,000 for taxpayers married filing separately). This does not apply to acquisition indebtedness incurred before December 15, 2017. The home equity loan interest deduction is suspended.

Charitable contributions deduction: The deduction limit will be increased to 60% of AGI from the current rate of 50%.

Medical expenses deduction: The new threshold on medical expenses deductions is now reduced from 10% of your AGI to 7.5% for all taxpayers for years beginning after December 31, 2016 and ending before January 1, 2019.

Gambling losses deduction: Under the new rule, gambling losses along with related gambling expenses are now deductible to the extent of gambling gains. Call us for further explanation.

Miscellaneous itemized deductions: Miscellaneous deductions subject to the 2% of AGI limitation are now being suspended.

·     For example, tax preparation fees, investment expenses, and any unreimbursed employee expenses will be removed

Pease limitation: Total allowable amount of itemized deduction is now no longer subject to 3% AGI “Pease limitation”.

Other Provisions you need to know.

Alimony: For any divorce/separation agreement executed after December 31, 2018, or executed before that date but modified after it, the Act would rule that the alimony and separate payments are not deductible by the payer spouse and are not included in the income of the payee spouse.

529 Plan: For tax years beginning after December 31, 2017, “qualified higher education expenses” are now expanded including tuitions at elementary and/or secondary public, private, or religious school, and home-school costs, up to $10,000 per tax year.

Estate/Gift Tax: For estates/gifts made after December 31, 2017, the lifetime tax exemption amount would be doubled to $11.2 million taking an effect of indexed for inflation.

Alternative Minimum Tax (AMT) Exemptions: The Act increases the AMT exemption amount to $109,400 for married filing joint, $70,300 for single, and $54,700 for married filing separate returns. The 25% “phase-out” rule is retained and the phase-out amounts are being increased as well. The phase-out of AMT exemption for married filing joint taxpayers begins at $1 million and $500,000 for single taxpayers.

Child tax credit: The Act would increase the child tax credit to $2,000 per qualifying child, with up to $1,400 of the amount being refundable. This benefit will start to phase out for a married filing jointly taxpayer at $400,000, and $200,000 for all other taxpayers. An additional $500 nonrefundable credit is provided for certain non-child dependents, like elderly parents who qualify as dependent.

Individual Mandate: The Shared responsibility payment (Individual mandate penalty) has been repealed as of January 1, 2019. The Act eliminates the individual mandate penalty for not having health insurance starting in 2019. It is worth noting the Affordable Care Act’s (ACA) individual mandate penalty remains in effect for 2018.

Note there are several limitations and exceptions to many of these changes.

Contact our consultants at 877.FOR.HWCO or hwco@hwco.com to discuss the best action for your specific tax situation and structure.