If you’re like most Americans, you know the few key points about the new tax law that your favorite news show or website keeps highlighting. I wanted to create an easy way for you to review what has changed that might impact you, but there is so much that has changed that I don’t know if I can cover it all. I’ll keep it brief, and use a table of contents so you can jump to the areas that interest you most. At the end of this post you’ll find a table comparing the new tax code to the one it replaced.
Provisions Impacting Everyone
If you have Dependents
Estate and Trusts
First off, which laws are permanent and which laws will sunset in 2025?
Basically all of the changes to the corporate tax code, and the removal of the individual mandate to have health insurance or pay a penalty tax are permanent. How tax brackets are indexed is also permanent, but it's a bit technical, so I won’t go into it here. If you’re interested, feel free to look up the difference between CPI and chained CPI. All of the changes to the individual tax code that I mention below will sunset in 2025.
While the number of tiers in the marginal tax bracket system have remained the same, the rates for many of the brackets decreased slightly. Here are the 2018 tax brackets. At the end of the post there’s a comparison of these with the 2017 tax brackets.
2018 Tax Brackets
|Up to $9,525||10%|
|$9,525 - $38,700||12%|
|$38,700 - $82,500||22%|
|$82,500 - $157,500||24%|
|$157,500 - $200,000||32%|
|$200,000 - $500,000||35%|
Married Filing Joint
|Up to $19,050||10%|
|$19,050 - $77,400||12%|
|$77,400 - $165,000||22%|
|$165,000 - $315,000||24%|
|$315,000 - $400,000||32%|
|$400,000 - $600,000||35%|
Standard Deduction and Personal Exemptions
The biggest change for most people will be the change to the deductions. The standard deduction was increased while the personal exemption was repealed. The new standard deduction is $12,000 for individuals and $24,000 for married filing joint.
Child Tax Credit
The Child Tax Credit has been increased to $2,000 of which $1,400 will be refundable if the credit reduces your tax liability to $0. Also, the Child Tax Credit phaseout limits were increased to $200,000 for individuals and $400,000 for married filing joint (these thresholds are NOT indexed for inflation, which means the number can only be adjusted by an act of Congress).
529 Allowable Expenses
529 funds can now be used tax-free to pay for primary and secondary school expenses (or elementary through high school if you prefer that nomenclature). Up to $10,000 per student per year can be used to help pay for public, private, or religious schools.
529 ABLE Rollovers
529s can now be rolled over to 529 ABLE accounts (for students with disabilities) if the beneficiary does not change. This is limited to the annual contribution limit, along with contributions from all sources. So if a student becomes disabled after building up a good sized 529 the account can slowly be changed over to an ABLE account.
Dependent Tax Credit
For dependents that don’t qualify for the Child Tax Credit, there is a new $500 nonrefundable credit. This may include children 17 or older, or even parents that you are taking care of in your home. This credit phases out for individuals at $200,000 and at $400,000 for married filing joint (these thresholds are NOT indexed for inflation).
Unearned income for children under 19 or full-time students under 24, is taxable the same as trust income. All unearned income over $12,500 is taxed at 37%.
Estates, Trusts, and Kiddie Tax
|Up to $2,550||10%|
|$2,550 - $9,150||24%|
|$9,150 - $12,500||35%|
Estate and Trust Tax Brackets
There are now only 4 brackets for trusts and estates.
Estate and Gift Tax Exemption
Estate and Gift Tax will now not be due on estates/gifts of less than $11,200,000 for individuals, $22,400,000 for married couples using the portability rules (or an A/B Trust).
Medical Expense Deduction
For 2017 and 2018 the threshold to deduct medical expenses is lowered to 7.5%. Starting in 2019 the threshold is increased back to 10%.
State and Local Taxes
Income, Sales, and Property Taxes from State and Local governments will still be an itemized deduction, however, with a $10,000 cap of these taxes combined. The $10,000 cap applies to both individual filers as well as married filing joint.
Mortgage Interest Deduction
Mortgage interest on first or second homes on loans up to $750,000 will be deductible. Existing mortgages that were deductible, but are over this limit are grandfathered into deductibility. Additionally Home Equity loan interest is no longer deductible.
Charitable Contribution Deduction
Deductions on cash gifts to charities are now limited to 60% of the taxpayer's AGI. Substantial documentation is still required to claim this deduction.
Casualty Loss Deduction
Personal casualty losses are now only deductible if they are attributable to a declared national disaster.
Miscellaneous Itemized Deductions
Items that could be claimed under the Miscellaneous Itemized Deductions subject to a 2% of AGI floor are no longer deductible. Specifically you can no longer claim unreimbursed employee expenses if you are a W-2 employee (home office expenses, travel for work, etc.), tax preparation fees, or investment fees.
Alternative Minimum Tax
The AMT Exemption was increased to $70,300 for individuals and $109,400 for married filing joint. The phaseout for AMT Exemption was increased to $500,000 for individuals and $1,000,000 for married filing joint.
Capital Gains and Qualified Dividends
No changes were made to capital gains and qualified dividend tax rates or marginal brackets. This means that while the tax brackets capital gains used to be tied to increased, the capital gains brackets did not. Additionally the 3.8% “Medicare Surtax” on investment income is unchanged.
Qualified Business Income Deduction for Pass-Through Entities
Okay, everything so far has been fairly simple, at least compared to this piece. If you own your own business read this carefully and then dig in and do your own research until you figure out how this works. This is only the highlights and doesn’t go into all the details (like the alternative wage limit) If you don’t have your own business, feel free to skip this section.
Certain Partnerships, LLCs, S Corporations, and Sole Proprietorships that file Schedule C (pass-through entities) will have a deduction of 20% of their Qualified Business Income (QBI) (or 50% of payroll, whichever is lower) effectively causing the business to only pay tax on 80% of their pass-through income. This deduction will be on the personal 1040 below the line (it won’t lower your AGI), but is not an itemized deduction (so you can still claim the new higher standard deduction in addition to this).
QBI is NOT - investment income, income from a foreign business activity, reasonable compensation for an S Corp owner-employee, or any guarantee payment for services in a partnership or LLC.
QBI IS - net profit “connected with conduct of a trade or business within the United States….included or allowed in determining taxable income for the taxable year.” Note that this is based on the company, not your income.
If your taxable income (after deductions) is above $157,500 ($315,000 for married filing joint), AND you do business in “specified services” your exclusion will be reduced or phased out. These “specified services” include: health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, or any other trade or business where the primary asset of the business is the reputation or skill of one or more of its employees. Engineers and architects are specifically excluded from this exclusion list (so they still get the QBI deduction).
If your taxable income (after deductions) is above $157,500 ($315,000 for married filing joint), and you are not affected by the above phaseout, you will have a limitation on the amount of the deduction based on the W-2 wages paid by the business.
Existing Deductions and Credits that were left Unchanged
- Elderly and Dependent Care Credit
- Tax Credit for Electric Vehicles
- $250 School Teacher Deduction
- Adoption Assistance Tax Credit
- Tax Preferences for Private Activity Bonds
- Capital Gains exclusion of $250,000/$500,000 of primary residence
Previous Tax Laws that were Revoked
- Individual Mandate - starting in 2019 there is no tax penalty for failing to own health insurance
- Alimony - For divorce decrees after December 31, 2018 alimony payments are no longer deductible, and the recipient no longer reports alimony as taxable income.
- 1031 Exchanges - Beginning 1/1/2018 1031 exchanges can ONLY be done on real estate NOT investment property.
- Moving expenses - Moving expenses are no longer deductible, regardless of the distance moved to take on a new job. This also means that reimbursed moving expenses will now be taxable income to the employee.
- Business Entertainment Expenses - M&E (meals and entertainment) are common expenses for businesses, as of now only M is deductible (still limited to 50%).
- Deferred Compensation - more deferred compensation will be taxed when it is vested regardless of when it is paid.
- Sexual Harassment Settlements - previously a company could deduct a settlement and related attorney fees made for sexual harassment lawsuits, under the new law they still can, as long as they don’t require a non-disclosure agreement as part of the settlement.
Then and Now
2017 and after 2025
2018 - 2025
|529s||Can pay for college||Can also pay for primary and secondary education|
|Cannot roll over to ABLE||CAN roll over to ABLE|
|Deferred Compensation||Taxable when paid||Taxable when vested|
|Alimony||Deduction for paying||No deduction when paying|
|Taxable Income when received||Not taxable income when received|
|Qualified Private Activity Bonds||Tax-Free, subject to AMT||No change|
|1031 Exchanges||Includes boats, airplanes, etc.||Only allowed for real estate|
|Business Entertainment||50% deductible||Not deductible|
|Sexual Harassment Settlements||Deductible to company||Not deductible if an NDA is required|
|Primary Residence||$250,000/$500,000 Cap Gain Exclusion||No change|
Above the Line Deductions
|School Teacher Deduction||$250||No change|
|Moving Expenses||Deductible w/ requirements||Not deductible|
|Moving Bonus||Non-taxable income||Taxable income|
Below the Line Deductions
|Pass-through income||No deduction||20% QBI Deduction (with limitations)|
|Medical Expenses||10% floor for deductions||7.5% floor for deductions (until 2019)|
|State and Local Taxes||Uncapped Deduction||Combined $10,000 Limit|
|Mortgage Interest||Cap of $1,000,000 Principal||Cap of $750,000 Principal|
|HELOC interest deductible||HELOC interest NOT deductible|
|Charitable Contributions||50% of cash gifts deductible||60% of cash gifts deductible|
|Casualty Loss||Financial loss deductible||Federally declared disaster required|
|Unreimbursed Business Expenses||Deductible subject to 2% floor||No longer deductible|
|Tax Preparation Fees||Deductible subject to 2% floor||No longer deductible|
|Investment Expenses||Deductible subject to 2% floor||No longer deductible|
|Child Tax Credit||$1,000 (Fully Refundable)||$2,000 ($1,400 Refundable)|
|Dependent Tax Credit||N/A||$500|
|Elderly/Dependent Care Credit||Up to $1,050||No change|
|Electric Vehicle Credit||Up to $7,500||No change|
|Adoption Assistance Credit||$13,570||No change|
|AMT Exemption||$54,300 / $84,500||$70,300 / $109,400|
|AMT Exemption Phaseout||$120,700 / $160,900||$500,000 / $1,000,000|
|Individual Mandate||Penalty Up to $2,085||Revoked after 2018|
|Kiddie Tax Income before Max Rate||$2,100||$12,500|
|Kiddie Tax Rate||Parent’s Top Marginal Rate||Up to 37% (based on Trust Tax Brackets)|
|Up to $9,325||10%||Up to $9,525||10%|
|$9,325 - $37,950||15%||$9,525 - $38,700||12%|
|$37,950 - $91,900||25%||$38,700 - $82,500||22%|
|$91,900 - $191,650||28%||$82,500 - $157,500||24%|
|$191,6500 - $416,700||33%||$157,500 - $200,000||32%|
|$416,700 - $418,400||35%||$200,000 - $500,000||35%|
|Over $418,400||39.6%||Over $500,000||37%|
|Married Filing Joint||Married Filing Joint|
|Up to $18,650||10%||Up to $19,050||10%|
|$18,650 - $75,900||15%||$19,050 - $77,400||12%|
|$75,900 - $153,100||25%||$77,400 - $165,000||22%|
|$153,100 - $233,350||28%||$165,000 - $315,000||24%|
|$233,350 - $416,700||33%||$315,000 - $400,000||32%|
|$416,700 - $470,700||35%||$400,000 - $600,000||35%|
|Over $470,700||39.6%||Over $600,000||37%|
|Estates and Trusts||Estates, Trusts, and Kiddie Tax|
|Up to $2,550||15%||Up to $2,550||10%|
|$2,550 - $6,000||25%||$2,550 - $9,150||24%|
|$6,000 - $9,150||28%||$9,150 - $12,500||35%|
|$9,150 - $12,500||33%||Over $12,500||37%|