Navigating the Tax Cuts and Jobs Act of 2017

February 5, 2018

It’s our favorite time of the year, tax time! So say us busy accountants around the country, at least those of us who enjoy being busy – very busy! The end of 2017 brought about some comprehensive and very interesting changes to our federal tax laws which significantly affect just about every American who works and pays taxes. While the changes are generally beneficial to most businesses and to many individuals, the new law did nothing to simplify the tax code, which was one of its stated goals. In early 2018, it’s crucial to consult your tax professional to keep your financial house in order when dealing with the IRS.

Our January 2018 newsletter covered key elements of the new tax law and we’re happy to republish some of the important provisions on our blog. Remember that to file properly and prepare for next year’s filing, now is the time for filing as well as planning!

What You Need to Know Now

1. File your tax return. If you have – not already done so, file your 2017 tax return. The only retroactive change made to 2017 in the new tax bill is the rollback of the medical deduction threshold from 10% to 7.5% of Adjusted Gross Income (AGI). Filing your 2017 tax return is a key component in understanding how your 2018 tax obligation will change.

2. Understand what has not changed. While the changes created in this tax act are vast, some core areas remain unchanged. Key tax topics that might cause confusion are:
– Tax-advantaged savings accounts. Do not alter your tax plans to contribute to your retirement through IRAs and 401(10s. Continue using other tax-advantaged accounts like Health Savings Accounts (HSAs) and 529 education savings accounts. None of these tax benefits go away.
– Individual mandate penalty. While set to zero in 2019, the penalty for not having health insurance stays in place during 2018. So keep your health insurance or plan to pay the penalty.
– Alimony. The deductibility for alimony paid is in place for 2018 but is eliminated in 2019. Alimony received is also impacted.

3. Note the lower tax rates. While there are still seven tax rates, most of the rates have been lowered. The marriage penalty built into the income brackets has also been eliminated for all except the highest income earners. You will need to review your withholdings as soon as the IRS publishes new withholding guidelines.

4. Understand the new world of deductions. The standard deductions have been nearly doubled, the personal exemption eliminated, and allowable itemized deductions dramatically altered. You will want to create an initial forecast of next year’s obligations.
5. Effect on Small Business. The bill introduced a 20 percent income reduction calculation for S Corps, partnerships, and sole proprietors. 100 percent first-year bonus depreciation is available once again along with a $1 million limit for Section 179 expensing.
6. The Law is Temporary. To control the forecasted cost of this tax bill, most of the tax law changes are set to expire in 2025. This makes planning very difficult, but even more important.

Here’s a helpful summary of the new income brackets, tax rates and standard deductions for 2018:

Click table for larger view.

The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filing jointly. Not only does the standard deduction double, but many itemized deductions are no longer available or are now limited.

To help cover the cost of this dramatic increase, the bill does three things:
1) It suspends the use of personal exemptions. 2) It dramatically increases standard deductions. 3) It limits itemized deductions. For example:

  • State and local tax deductions are limited to $10,000.
  • There is no longer a home equity interest deduction.
  • Home acquisition interest deductibility is now based on $750,000 (formerly $1 million) of indebtedness. This impacts loans taken out after 12/14/2017. Prior mortgages still use the $1 million limit.
  • Theft and casualty losses are limited to federally declared disasters.
  • Miscellaneous deductions subject to the 2 percent of adjusted gross income threshold are now gone. This includes things like uniforms, fees for services and other unreimbursed business expenses.

What does all this mean?
While many will no longer itemize deductions, don’t be too hasty to assume it will include you. You will probably still itemize if:

  • You have a home mortgage.
  • You have high medical expenses.
  • You like to contribute to charities.
  • You are single and have high property or state income taxes.

Some good news: The bill eliminates the possibility of having your itemized deductions reduced (phased out) and the Alternative Minimum Tax (AMT) exemption amount increases dramatically in the new tax bill. Those that itemize will find itemized deductions more predictable, creating a possible tax-saving opportunity.

There is much more to this new and still very complex tax code that we could never fully cover in a blog post but we’re confident that we’ve outlined some of the major tax provisions that you need to know about.

Feel free to contact us if you have questions about our tax planning and filing services for businesses and individuals.

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