2017 certainly went out with some fireworks. President Trump signed the Tax Cut and Jobs Act (Act), which made significant changes for individuals and businesses. The changes cut income tax rates, doubles the standard deduction and eliminates personal exemptions. The corporate cuts are permanent. The individual changes expire at the end of 2025.
The 2018 Tax Brackets
In President Trump's campaign tax plan, he proposed reducing the number of tax brackets from seven to three, and the House of Representatives' original tax reform bill contained four brackets. However, the final bill kept the seven-bracket structure but with mostly lower tax rates. Those rates are as follows:
|Marginal Tax Rate||Single||Married Filing Jointly||Head of Household||Married Filing Separately|
|37%||Over $500,000||Over $600,000||Over $500,000||Over $300,000|
The highest tax bracket used to be 39.6% so anyone that is a high-income earner will save 2.6%.
No More Marriage Penalty? Not Quite.
The married filing jointly income thresholds are exactly double the single thresholds for all but the two highest tax brackets in the new tax law. In other words, the marriage penalty has been effectively eliminated for everyone except married couples earning more than $400,000.
Standard Deduction and Personal Exemption, Gone But Not Forgotten
The standard deduction has roughly doubled for all filers, but the valuable personal exemption has been eliminated. For example, a single filer would have been entitled to a $6,500 standard deduction and a $4,150 personal exemption in 2018, for a total of $10,650 in income exclusions. Under the new tax plan, they would just get a $12,000 standard deduction. It is not truly doubled but merely simplified. In 2026, it reverts back. It is assumed that most people will take the standard deduction. It will be interesting to see the impact this will have on the housing market and whether this will lead to lower housing prices.
Child and Elder Care Tax Credit
Although the personal exemption has been eliminated, there is still the Child Tax Credit, which is available for qualified children under age 17. Specifically, the bill doubles the credit from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400. Even parents that do not earn enough to pay taxes, can claim the credit up to $1,400. In addition, the phaseout threshold for the credit is dramatically increasing.
|Tax Filing Status||Old Phaseout Threshold||New Phaseout Threshold|
|Married Filing Jointly||$110,000||$400,000|
If you care for elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds above.
The new bill allows the use of funds saved in a 529 college savings plan to include education other than college. In other words, if you have children in private or religious school, or you pay for tutoring for your child in the K-12 grade levels, you can use the money in 529 accounts for these expenses. The funds can also be used for expenses for home-schooled students.
Probably one of the most controversial pieces of the new bill in NY, NJ, CA and some other high tax states was the cap on the mortgage interest deduction and the State and Local Taxes deduction. These three deductions remain, but there have been significant changes to each:
The mortgage interest deduction can only be taken on mortgage debt of up to $750,000, down from $1 million currently. This only applies to mortgages taken after Dec. 15, 2017, preexisting mortgages are grandfathered. The interest on home equity debt can no longer be deducted, whereas one used to be able to deduct interest up to $100,000 on home equity debt.
Taxpayers can deduct donations of as much as 60% of their Adjusted Gross Income (AGI), up from a 50% cap. Donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.
The threshold for the medical expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. Unlike most other provisions in the bill, this is retroactive to the 2017 tax year. This is a great benefit to individuals with high medical bills.
State and Local Taxes
The State and Local Tax (SALT) deduction has been retained, however, the total deductible amount is limited to $10,000, including income, sales, and property taxes. For anyone living in a high tax state such as New Jersey, there is a good chance that your property taxes alone are over $10,000. As a result, you would only be able to deduct up to $10,000 thereby leaving the State income tax as non-deductible on the federal level.
Itemized Deductions that are Eliminated
Gone for the 2018 tax year are the deductions for:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Other miscellaneous deductions previously subject to the 2% AGI cap
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
Alimony. Will There Be a Rush to Get Divorced in 2018?
In divorce situations, one spouse or ex-spouse may become legally obligated to make payments to the other party. Because these payments are often substantial, locking in tax deductions for the payer has often been an important issue. Before the new Tax Cuts and Jobs Act, payments that met the tax-law definition of alimony could always be deducted by the payer for federal income tax purposes and recipients of alimony payments always had to report the payments as taxable income.
Under the new law, alimony payments will not be deductible and will not be income to the recipient. The alimony provisions are effective for any divorce or separation instrument executed after December 31, 2018 and any divorce or separation instrument executed before that date but modified after that date if the modification expressly states that the amendments made by this section of the Act apply to such modification. This provision does not sunset after 2025.
No Health Insurance, No Problem in 2019
Republicans were unsuccessful in their efforts to repeal the Affordable Care Act, otherwise known as Obamacare, in 2017. However, the tax reform bill repeals the individual mandate, meaning that people who do not buy health insurance will no longer have to pay a tax penalty.*
*You should note that this change does not go into effect until 2019, so for 2018, the "Obamacare penalty" can still be assessed.
The Dreaded Alternative Minimum Tax, Take 2
The alternative minimum tax, or AMT, was implemented to ensure that high-income Americans paid their fair share of taxes, regardless of how many deductions they could claim. For some reason, whether done on purpose or by mistake, the AMT was not indexed for inflation, so over time, the AMT started to apply to more and more people, including the middle class, which it was never intended to affect.
The tax reform bill permanently adjusts the AMT exemption amounts for inflation in order to address this problem, and raises the thresholds. That sound you hear are the cheers from the middle class and upper class alike.
Here's how the AMT exemptions are changing for 2018:
|Tax Filing Status||2017 AMT Exemption Amount||2018 AMT Exemption Amount|
|Single or Head of Household||$54,300||$70,300|
|Married Filing Jointly||$84,500||$109,400|
|Married Filing Separately||$42,250||$54,700|
In addition, the income thresholds at which the exemption amounts begin to phase out are dramatically increased. Currently, these are set at $160,900 for joint filers and $120,700 for individuals, but the new law raises the threshold to $1 million and $500,000, respectively.
Estate Tax Exemption
Most Americans will never pay a federal estate tax as it only applies to a small percentage of households. The previous law would tax an estate at 40% if the estate was valued at $5.49 million or more per individual, or $10.98 million per married couple.
However, the new tax law exempts even more households by doubling these exemptions. Now, for 2018, individuals get a $11.2 million lifetime exemption and married couples get to exclude $22.4 million. This amount is also indexed for inflation. You may be thinking, wow; this all sounds too good to be true, so what’s the catch you ask? Well, this provision is scheduled to sunset on January 1, 2026 and revert to the 2017 levels, adjusted for inflation.
Most of the Tax Breaks Are Temporary
Most of the changes to individual taxes made by the bill are temporary as they are set to expire after the 2025 tax year. What will happen in 2026, stay tuned!
Sole Proprietorships, LLCs, Partnerships, and S Corporations, Oh My!
The new tax code makes a big change to the way pass-through business income is taxed. This includes income earned by sole proprietorships, LLCs, partnerships, and S corporations. Under the new law, taxpayers with pass-through businesses like these will be able to deduct 20% of their pass-through income limited to 50% of the taxpayer’s pro rata share of the total W-2 wages paid by the business (including wages paid to the taxpayer). The Joint Explanatory Statement explains that the W-2 wages limitation is meant to “deter high-income taxpayers from attempting to convert wages or other compensation for personal services to income eligible for the 20-percent deduction.”
However, like a lot of tax incentives there are phase outs. There are income limits that apply to "professional services" business owners such as lawyers, doctors, and consultants, which are set at $157,500 for single filers and $315,000 for pass-through business owners who file a joint return.
Corporate Tax Rates
One of the most talked about changes from the tax bill comes on the corporate side. The bill lowers the corporate tax rate to a flat 21% on all profits. This is not only a massive tax cut, but is a major simplification of the corporate tax structure. This may be as close as we will ever get to a flat tax.
The purpose of this tax cut was simple. The global average corporate tax rate is about 25% so this move is designed to make the U.S. more globally competitive, which should in turn help keep more corporate profits and jobs in the United States. In addition, the corporate AMT of 20% has been repealed.
The tax reform bill also changes the U.S. corporate tax system from a worldwide one to a territorial system. Currently, U.S. corporations have to pay U.S. taxes on their profits earned abroad, and the new system will end this effective double-taxing of foreign profits. Therefore, businesses are incentivized to keep operations in the U.S. Hopefully, this will create more jobs for its citizens.
Repatriation of Foreign Cash and Assets - We are Talking to You, Apple!
As a result of the worldwide tax system, which makes foreign profits subject to the 35% top corporate tax rate, there is about $2.6 trillion in U.S. corporations' foreign profits held overseas. For example, it is believed that Apple has more than $200 billion overseas. In order to bring this money back to the United States, the new tax law sets a one-time repatriation rate of 15.5% on cash and equivalent foreign-held assets and 8% on illiquid assets like equipment, payable over an eight-year period.
Like-Kind Exchanges Limited to Real Property
Like-kind exchanges are permitted for property held for use in a trade or business or for investment. Under pre-Act law, like-kind exchanges were permitted for real or personal property. Under the Act, like-kind treatment will be limited to real property.
NEW TAX LAWS FOR NEW JERSEY
Several important legislative changes will impact filings during 2018 and will affect consumers, retirees, veterans, businesses and heirs who receive an inheritance.
Sales and Use Tax
As part of the dreaded gas tax bill there was a sales and use tax reduction tied into it. The New Jersey Sales and Use Tax is being reduced in two phases between 2017 and 2018:
- On January 1, 2017, the tax rate decreased from 7% to 6.875%
- On January 1, 2018, and after, the tax rate will decrease to 6.625%
So, for every $100.00 you spend you will be saving 0.25 cents for 2018 or 0.38 cents compared to the original 7% sales and use tax rate in 2016. I can already see retirement in my future with all of those savings.
Estate Tax and Inheritance Tax
The New Jersey Estate Tax is being phased out in two parts:
- On January 1, 2017, the New Jersey Estate Tax exemption increased from $675,000 to $2 million. The Estate Tax exemption is the amount of property that can be transferred (inherited) before a New Jersey Estate Tax liability is incurred. This means that individuals dying on or after January 1, 2017, can leave up to a $2 million estate to their heirs without being subject to any New Jersey Estate Tax;
- On January 1, 2018, the New Jersey Estate Tax will no longer be imposed for individuals dying on or after that date.*
* This author thinks that at some point in 2018 the New Jersey Estate Tax will be reinstated and could possibly revert to $2,000,000 at some point. New Jersey has never been one to turn down tax dollars and I do not think they will start now.
Don’t forget the Inheritance tax is NOT going away. So if you leave your estate to people other than direct family members, your estate could still be subject to inheritance tax.
Retirement Income Exclusion – The retirement income exclusion is available to taxpayers with $100,000 or less in gross income for the entire year and who are 62 or older or blind or disabled. The exclusion is being increased over a four-year period, beginning with Tax Year 2017, as shown below:
Retirement Income Exclusions for Tax Year 2017 and After
|Tax Year||Married/CU Couple,
Filing Joint Return
Filing Separate Return
|Single, or Head of Household, or Qualifying Widow(er)/Surviving CU Partner|
|2020 & after||$100,000||$50,000||$75,000|
Personal Exemption for Veterans — Veterans who were honorably discharged or released under honorable circumstances from active duty in the Armed Forces of the United States will be eligible for an additional $3,000 exemption. This includes persons serving in the Armed Forces Reserves or National Guard of New Jersey.
What Should You Do Now?
As you can see the tax landscape continues to change. While these changes are beneficial, proper planning is always advised to take full advantage of them – please contact us for a consultation to find out what you need to do now.
Author: Blake R. Laurence