18 Dec 2017 Tax Reform Bill
2017 Tax Changes and the GOP Tax Bill
This is the biggest tax reform since 1986. Interestingly in that one it took about 14 months to create, modify, pass and sign the bill into law. This year from start to finish it will be only a few months from the goals set forth by President Trump to the expected signing this week. What that means is there will be unintended consequences from things not fully thought through. Those can be opportunities to take advantage of and even if temporary, reduce your tax burden. An interesting aspect of the process is that it was done under budget reconciliation. That limited the “projected” effect on the deficit to $1.5 trillion, so many provisions had to be restricted or reduced to accomplish the purposes.
The goals set forth were to 1) make the code simple and fair, 2) give American workers a raise, 3) make America great through attracting more business by leveling the playing field, and 4) bring back trillions of dollars currently parked offshore to invest back into the American economy. While the international and large corporate changes were a big part of it, we are focused on the ones that affect families directly and their small businesses.
I will not go into extensive details in this post, but do watch for our Lunch and Learn trainings coming up through this Family Business Center website or social media if you want to learn more about how this will affect you. Here are some major changes though:
- Tax Brackets – the new law keeps the 7 brackets, but they drop from 10%, 15%, 25%, 28%, 33%, 35% and 39.6% to now 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The range each bracket covers increased slightly but remained similar to prior law.
- The exemptions and standard deduction were rolled up into one enhanced standard deduction. A married couple in 2017 would have a standard deduction of $12,700, and in 2018 that goes to $24,000. However, in 2017 that couple would have $8,200 from their two exemptions, where in 2018 no exemptions will apply. Still overall it’s an increase in the deduction.
- To offset the effect that would have on families the child tax credit was increased from $1,000 to $2,000. It is refundable up to $1,400 now too, and doesn’t phase out until $400,000 (up from just $110,000 in 2017.) This will be a major factor for our client base to reduce real income tax.
- Mortgage interest stays deductible on up to $750,000 of new debt, but the existing mortgages will follow the old rule. Home Equity is limited as well in 2018 and beyond. It’s not clear to me yet how existing home equity will be treated, but I’d expect it will not be deductible.
- Employee business expenses, cost of tax preparation (if not through a business), investment fees and expenses, and other miscellaneous itemized deductions will not be deductible in 2018 and beyond.
- State income tax, property tax, and sales tax deductions were on the table to be completely eliminated. The final bill grants up to a combined total of $10,000 that can be deducted.
- Medical and charitable deductions are unchanged, other than that the floor for medical is reduced to 7.5% again.
- Estate tax goes to $10 million per person, so that pretty much eliminates that from consideration for most of the country.
- Pass-through income from partnerships, S-Corporations, and sole proprietorships will see a big reduction in the maximum tax rate. The plan would set a 20 percent business income deduction for the first $315,000 in income earned by pass-through businesses.
- The Alternative Minimum Tax (AMT) is gone unless you hit much higher incomes. This is great news as it complicates and limits a lot of planning strategies.
- The mandate for insurance under Obamacare is no longer applicable for 2018 and beyond.
What you need to do now:
There are a number of articles out there about these changes, but keep in mind that without a general understanding of your personal tax situation it can be misleading as to what is beneficial to you and what is not. In general though, this is what we would encourage our clients to consider for 2017 to take advantage of some of these tax changes.
- If you did not itemize before, you probably won’t under this plan either. You should see an increase in deductions and there is not much else you would need to do unless you have business income.
- If you have itemized, review the amounts on your Schedule A and see how that would look under the new plan. If for example you are married and had $14,000 in total deductions ($5,000 from taxes, $4,000 in mortgage interest and $5,000 in charitable deductions) you would expect that in 2018 you would not itemize and just take the $24,000 standard deduction. In this scenario prepaying any state or local tax and donations would make sense, and be sure to pay a mortgage payment before 12/31/17 to get the extra interest. Any of those deductions that fall into 2018 you would not expect any tax benefit from.
- If your combined state tax and property tax exceeds $10,000, consider prepaying state taxes that you would normally pay in April 2018 so they are deductible this year and you don’t lose the amount that exceeds $10,000 in 2018.
- If you have miscellaneous itemized deductions accelerate what you can into 2017. They won’t benefit you in 2018 even if you itemize.
- The general concept of delaying revenue and accelerating expenses usually makes sense every year, but especially this year. With lower personal rates and additional benefits to flow-through income for 2018 anything you can push into that year for net income should be beneficial beyond the typical value just from the delayed payment of the tax.
Keep in mind that this bill is not signed into law yet, but we should be pretty certain that no major things will change before it is signed. We wanted to be sure the information was out to you as soon as possible though to make plans as needed. Every personal situation is different, and we cannot guarantee that this general education and advice will have the intended results without personally reviewing the plan. The late date of the bill though will not allow for individual meetings. As we have always done though, by educating you on the concepts you then have the enhanced ability to make choices that will be beneficial to you.
If you are interested in scheduling individual appoints to review these changes specific to you and your family or would like to take part in a bigger group Lunch and Learn event please contact us by email or phone (801-621-5440.)
– John Peterson is a CPA focusing on families and their small businesses in Ogden Utah since 1999.