There’s More Good News Than Bad in the Tax Cuts and Jobs Act
Though it was passed several months ago, the Tax Cuts and Jobs Act is still being slowly broken down to taxpayers wondering how they’ll be affected. High net worth individuals and businesses are learning that their 2018 tax obligation could be reduced by this legislation – significantly so, in some cases.
What will the impact be on you?
Some parts of the new tax law are easy to understand, like the lowering of individual tax rates. All have been reduced, and now stand at 10, 12, 22, 24, 32, 35, and 37 percent. The standard deduction is now much higher, too. Single filers will get a $12,000 deduction; heads of household, $18,000; and joint filers, $24,000. There will no longer be a personal exemption, though.
Many individuals were hoping that the Alternative Minimum Tax (AMT) would be appealed outright (it was, for corporations). But this tax, which was originally designed to affect high-income households, will now affect far fewer people. Determining whether you must pay it requires quite complex calculations; we recommend you consult with us if you suspect you may be targeted.
The Tax Cuts and Jobs Act also increased the threshold for charitable deduction limitations. You can now deduct 60 percent of your Adjusted Gross Income (AGI) rather than the previous 50 percent. If you’re donating stock, the threshold is 30 percent.
Before the new tax law was passed, high-income households were required to reduce the total of their itemized deductions by 3 percent of the amount that their AGI exceeded $261,500 (individuals) or $313,800 (married couples). The Tax Cuts and Jobs Act repealed that restriction; all itemized deductions can now be claimed in full.
Another plus for some businesses: Pass-through entities (partnerships and S Corporations) and some other unincorporated entities like sole proprietorships will be able to deduct 20 percent of their business income — as long as the taxable income they report doesn’t exceed $157,500 (single taxpayers) or $315,500 (joint returns). Once that threshold is passed, the deduction will be reduced based on several factors.
This provision is more complicated than it may sound. For example, even some businesses that are structured so that income “passes through” to individual returns may not be eligible for any deduction. These include businesses that provide medical, legal, accounting, and other specified services.
Some Lost Ground
Perhaps one of the more contentious elements of the Tax Cuts and Jobs Act is the limitation placed on the deduction allowed for state and local taxes (SALT). For the 2018 tax year and beyond, the cutoff is $10,000 for state income and real estate taxes. There are ways to mitigate this with certain state credit programs, but it requires advance planning with your financial advisor.
Prior to the tax law being passed, you were able to deduct miscellaneous itemized deductions (investment advisory fees, home office expenses, etc.) if they exceeded 2 percent of your AGI. These are no longer deductible.
More to Learn
Some of these elements of the Tax Cuts and Jobs Act are scheduled to expire in 2025. Many of them have exceptions (like most IRS regulations), requiring interpretation by an expert. There are numerous provisions not outlined here. Our team stands ready to help you start planning for your 2018 taxes with all of this in mind. Contact us at your convenience, and we’ll get a head start on next year’s filing.