Tax Reform – Quick Guide

Wednesday, February 20th, 2019 Investment Comments

It’s about that time. It feels like you just clinked glasses to ring in the new year, and already it’s time to file your tax return. Congress passed the largest piece of tax reform legislation in more than three decades. The bill went into place on January 1, 2018, which means that it will affect the taxes of most taxpayers for the 2018 year (filing this spring). Here is a quick guide to some of the changes. While I try to provide you with accurate information, I do not pretend to be an accountant. Please contact your CPA for further information and advice.

Individual Tax Rates Drop
Tax rates have dropped across all brackets for individuals.

  • The old brackets are: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
  • The new brackets are: 10%, 12%, 22%, 24%, 32%, 35% and 37%


Standard Deduction Increases
No matter your filing status, the standard deduction increases in 2018. The new tax law nearly doubles the standard deduction amount.

  • Single and Married Filing Separately: $12,000
  • Married Filing Jointly: $24,000
  • Head of Household: $18,000
  • If over 65, additional $1,600 Single ($1,300 Married)
  • If blind, additional $1,600 Single ($1,300 Married)

Personal Exemptions Eliminated
Under the tax reform, taxpayers can no longer claim the $4,050 personal exemption for each of their qualifying dependents.

Child Tax Credit Increase
The Child Tax Credit increases in value from $1,000 to $2,000. Income phase-out thresholds rise to $200,000 for Single filers ($400,000 for Married filers). The credit is refundable up to $1,400.
The tax reform also introduces a new non-refundable credit of $500 for non-child dependents.

State and Local Capped
Taxpayers can only deduct up to $10,000 in state and local income taxes. This includes real estate taxes, personal property taxes, and the alternative general sales tax (for taxpayers in states with no income tax).

Miscellaneous Itemized Deductions (subject to 2%) Eliminated
Another casualty of tax reform is the category for miscellaneous itemized deductions. This includes employer Unreimbursed Expenses, Investment Fees, Tax Preparation Fees, Safety Deposit box, etc.

Mortgage Interest Deduction Decreases
Individuals who purchase a home in 2018 can only deduct interest up to $750,000 in mortgage debt used to acquire a personal residence (previously $1,000,000). Interest deductions on home equity loans, not used for home improvements, are now eliminated.
Contracts entered into before 2018 will have the old limitations grandfathered in. That would be $1,100,000 of debt used for home acquisition and/or home improvement.

Entertainment Expenses No Longer Deductible
What was previously known as “Meals & Entertainment” is now just “Meals.” All entertainment expenses associated with sports games, golfing, and other ticket venues associated with entertaining clients are no longer deductible. Only the meal portion of your business meeting is a deductible.

Qualified Business Income Deduction
With the corporate rate dropping to 21%, the IRS had to make an offset for pass-through entities. Active Pass-through entities and sole proprietorship’s are now eligible for a 205 deduction on qualified income. Many rules and limitations exist for this deduction and should be determined case by case.

Alternative Minimum Tax (AMT) Less Invasive
Initially enacted to stop high income taxpayers from avoiding tax, AMT over the past couple decades had actually turned into a tax that was targeting the middle class and retirees. However, tax reform finally made permanent increases to income thresholds and standard deductions. That along with the reduction in preference items due to SALT caps, means a majority of taxpayers that were subject to AMT prior to 2018 will no longer be.

529 Plan Now Include K-12 Expenses
For 2018, qualified education expenses now include up to $10,000 in annual expenses for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school. Previously, qualified expenses only included post high school education costs.

ACA Individual Mandate Repealed for 2019
Beginning in January 1, 2019, individuals who choose to go without healthcare coverage for the year will not have to pay tax penalties.
C Corporation Tax Rates Drop to 21%
In order to be globally competitive on a corporate level, corporate rates have been adjusted for a flat 21% tax. Previously there was a graduated rate reaching a maximum of 35%.

Chris Ulrich – United Home Loans
NMLS #215735

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