2018 Tax Cuts ...
First and foremost, merry holidays, and a very happy, healthy, prosperous New Year to all.
Apologies in advance for the late communication but … the POTUS just signed, sealed, and delivered the most sweeping tax law change since 1986 Tax Reform.
After much political deliberation, first Congress approved its version of a new federal tax bill, then the Senate took its turn, and passed a somewhat different version. Next, and again after much discussion, the House of Representatives, and the Senate finally collaborated on a combined, mutually agreeable alternative. This version was sent to President Trump who signed it into law on Friday, December 22, 2017. As far as I’m concerned, yes, there is some good, and but also some bad to the new regulations so … all I ask is … please “don’t kill the messenger”.
Before I discuss some of the changes that become effective on January 1, 2018, please note that they are all subject to sunset provisions through the end of 2025. Meaning, unless extended by law they will either expire, extended, or subject to change.
That said let me opine on last minute 2017 moves you might be able to take that could help reduce your 2017 tax bite.
As usual, where and whenever possible, defer 2017 income to 2018, and prepay or accelerate 2018 tax deductible expenses into 2017. For example, before December 31, 2017, contribute to charity, and, if possible, prepay 2018 mortgage interest, 2018 real estate taxes, and depending on your personal tax situation, possibly medical expenses, but, if at possible, be especially cognizant of prepaying 2018 miscellaneous itemized deductions in 2017. That said much of the existing rules and regulations remain in-tact for 2017.
Note – prepayment of 2018 state and local income taxes in 2017 has been disqualified so what was previously an acceptable tax avoidance maneuver will no-longer work.
If you are thinking about converting a Traditional IRA to a ROTH, wait until 2018 to do so. This will serve to defer potential 2017 taxable income to 2018.
As for 2018, the changes are, well … overwhelming, and this writing is subject to revision as clarity on the new rules develop.
A brief synopsis follows but is certainly not intended to be all inclusive. Yes, from my perspective the poorest, and the richest taxpayers will definitively enjoy most of the benefits from the changes, and, as usual, middle level taxpayers, in my opinion, will be lucky to breakeven.
The top bracket corporate tax rate for C Corporations has been reduced from 35% to 21%. A true economy booster.
Instead of lower tax rates, shareholders, members, and partners of pass-through entities such as S Corporations, LLC’s, and Partnerships will enjoy a 20% downward taxable pass-through adjustment. The exacting computation is yet to be clearly defined. However, professionals such as accountants, lawyers, doctors, and others earning more than a certain threshold amount will be exempted from this benefit. Why? I have no idea!
2018 business meals and business-related entertainment expenses, currently only deductible to the extent of 50% of the total amount spent, will no longer be tax deductible at all.
There will seven 2018 individual rates ranging from 10% to 37%.
Personal exemptions will be repealed in 2018. That means no more personal exemptions allowed for individuals and their dependents.
The 2018 Standard Deduction will be increased to $12,000 for single taxpayers, and $24,000 for married taxpayers.
I believe the above the line adjustment to gross income for teacher’s expenses has been increased from $250 to $500. Yahoo!
Alimony - for 2017 and prior, those who pay alimony get an adjustment or reduction to gross income, and the payee or recipient pays tax on the maintenance amount received. In 2018 the alimony adjustment will no longer be allowed. Current payors will be grandfathered but new divorce matters will be subject to some additional negotiations in this regard.
In addition, it is theorized that due to the lower corporate tax rates and pass-through entity adjustments mentioned above, after-tax cash flows, which is a typical value driver for small businesses, will increase, potentially contributing to a corresponding increase in small business valuations. The greater the after-tax cash flow, the higher the value. This too will, if not obviously, at least probably, add to the matrimonial equitable distribution negotiation process.
Most of your 2017 itemized deductions will be severely curtailed in 2018. However, at least the Charitable Donations allowance will remain in-tact.
Medical or healthcare deductions were in jeopardy but, in the last version of the law, medical expenses remain subject to a 7.5% of adjusted gross income (AGI) allowance in 2018, but … go to a 10% AGI adjustment in 2019. Meaning you can only itemize medical expenses incurred that exceed those permissible percentages.
Mortgage interest is currently limited to $1,000,000 of principal, and $100,000 on a home equity line of credit. In 2018, the mortgage interest deduction remains but will be restricted to the first $750,000 of loan principal. I believe, any interest paid on mortgages and lines of credit over the $750,000 threshold will not be allowed.
In 2018, the combined itemized deduction allowance for state and local income taxes, sales taxes, real estate, and property taxes will be limited to the first $10,000 paid, period. Any state and local income taxes, and, any real estate or property taxes exceeding $10,000 on the combined total amount paid, will not be allowed. This rather notable change in allowable tax deductions may affect home real estate values and cause other issues in states that currently have high income taxes as well as high property taxes.
In 2018 miscellaneous itemized deductions have been eliminated. Meaning? No more allowance for such items as Unreimbursed Employee Job Related Expenses, Job-Hunting Expenses, Safe Deposit Boxes, Investment Expenses, Broker’s Fees, Investment Interest, Professional Fees, Union Dues, et cetera … you can “FERGITABOWIT”.
To reiterate, if you can possibly prepay any of this stuff please do so however, bear in mind that if you are subject to the Alternate Minimum Tax (AMT) in 2017, your prepayment efforts may prove for naught.
With this writing, I believe the 2018 corporate AMT has been repealed, and please note that the 2018 AMT threshold for individuals has been increased so, fewer individual taxpayers may no longer get caught in what is known as the AMT trap.
The 2018 federal estate tax threshold or exemption amount has been increased from approximately a $5-million (subject to annual inflationary incremental adjustments) to $10-million plus per individual. However, proper estate planning and business valuations will still be imperative for portability and step up in basis substantiation purposes.
This entire dissertation pertains to Federal Tax Regulation changes for 2018 only, and is subject to correction as interpretations evolve, and how matters are to be properly treated are developed, and clarified. It is yet to be seen what’s going to happen at the state and local levels throughout the nation. GOOD LUCK to one and all …
Edward D. Heben, CPA/ABV/CFF, CVA, AEP, CMEA | 12/23/2017