Interested in Learning About the Changes in the New Tax Law?

Interested in Learning the New Tax Brackets?

1. Standard Deduction:

The new tax law changes the standard deduction to $12,000 on single returns, $18,000 for head-of-household filers and $24,000 on joint returns … up from $6,350, $9,350 and $12,700 in 2017.  Individuals age 65 or older and blind people get even higher standard deductions. Two 65-year-olds filing a joint return, for example, would add $2,500 to the $24,000 standard deduction. An individual taxpayer age 65 or older would add $1,550, bringing the standard deduction to $13,550.

The $4,050 deduction for each personal exemption claimed are eliminated. So a married couple with four kids would lose $24,300 in exemptions in exchange for the $11,300 boost in their standard deduction.

2. Childcare Credits:

The $1,000 tax credit for each child under age 17 is doubled to $2,000, with $1,400 of the credit refundable to lower income taxpayers. Additionally, the package significantly increases the income phase-out thresholds. The credit begins to phase out for couples with adjusted gross incomes over $400,000 (up from $110,000 in 2017) and $200,000 for all other filers (up from $75,000).

There is a new, non-refundable credit of $500 for each dependent who is not a qualifying child including, for example, an elderly parent or disabled adult child. This credit would phase out under the same income thresholds.

3. Rates Change:

              2017                                                           2018

Up to $18,650              10%                           Up to $19,050                10%
$18,651 to $75,900      15%                        $19,051 to $77,400          12%
$75,901 to $153,100     25%                       $77,401 to $165,000         22%
$153,101 to $233,350   28%                       $165,001 to $315,000       24%
$233,351 to $416,700   33%                        $315,001 to $400,000      32%
$416,701 to $470,700   35%                        $400,001 to $600,000      35%
Over $470,700              39.6%                       Over $600,000                37%

There are also new tax brackets for head of household filers as well as for married couples who opt to file separate returns.

Note that inflation indexing of the tax brackets and various tax breaks is altered in the tax package. Currently, the federal income tax brackets, standard deductions and many other tax items are adjusted annually based on the government-calculated Consumer Price Index. A chained CPI would result in lower inflation adjustments than the current index. The new law uses a chained CPI for inflation indexing. As a result, there would be smaller annual increases in tax brackets, standard deductions and other breaks.

4. Mortgage Interest:

Lawmakers reduced – from $1,000,000 to $750,000 – the amount of debt on which homeowners can deduct mortgage interest. The limit applies to mortgage debt incurred after December 15, 2017, to buy or improve a principal residence or second home. Older loans are still subject to the $1 million cap.

The law also bans the deduction of interest on home-equity loans. And this change applies to both old and new home-equity debt. Interest accrued on home-equity debt after December 31, 2017, is not deductible.

5. State and Local Property Tax Deductions:

Starting in 2018, the new law sets a $10,000 limit on how much you can deduct of the state and local taxes you pay. You can deduct any combination of state and local income or sales taxes or residential property taxes, up to the $10,000 cap.

Remember: If you are subject to the alternative minimum tax, state and local taxes are not deductible . . . no matter when you pay them.

6. Casualty Losses:

Going forward, the new law greatly restricts the opportunity for individuals who suffer un-reimbursed casualty losses from sharing the pain with Uncle Sam. Under the old rules, such losses were deductible by those who itemize to the extent the loss exceeded $100 plus 10% of their adjusted gross income. Starting in 2018, the law allows a deduction of such losses only if they occur in a presidentially declared disaster area.

7. Estate Taxes:

The new law doubles the amount that can be left to heirs tax-free in 2018, to about $11 million for singles and about $22 million for married couples (for federal estate tax, not PA inheritance tax which is unchanged). The amount will rise each year to keep up with inflation. But, as with many changes in the law, this one expires at the end of 2025, when the tax-free amount will revert to earlier levels.

The law does not change the rule that “steps up” the basis of inherited property to its value on the date the benefactor died. As in the past, any appreciation during the life of the previous owner becomes tax-free.

8. Medical Expense Deductions:

Under the old rules, medical expenses were deductible only to the extent they exceeded 10% of adjusted gross income. For 2017 and 2018, however, the threshold drops to 7.5% of AGI. Come 2019, the 10% threshold returns.

9. Alimony Deductions:

In the past, alimony paid under a divorce decree was deductible by the ex-spouse who paid it and treated as taxable income by the recipient. Starting with alimony paid under divorce or separation agreements executed after December 31, 2018, the reverse will be true: Payors will no longer get to deduct alimony, but the payments will be tax-free for the ex-spouse who receives them. (That’s the same rule that has and will continue to apply to child support payments.)

10. Roth IRA Conversions:

The new law will make it riskier to convert a traditional individual retirement account to a Roth. Under the old law, you could reverse such a conversion—and eliminate the tax bill—by “recharacterizing” the conversion by October 15 of the following year. Starting in 2018, such do-overs are done for. Conversions will be irreversible.

11. AMT:

The Alternative Minimum Tax survives but will be applied at higher tax rates.  It was removed for businesses.

12. Corporations and Pass-Through Businesses:

The new law slashes the tax rate on regular corporations (sometimes referred to as “C corporations”) from 35% to 21%, starting in 2018. The law offers a different kind of relief to individuals who own pass-through entities—such as S corporations, partnerships and LLCs—which pass their income to their owners for tax purposes, as well as sole proprietors who report income on Schedule C of their tax returns. Starting in 2018, many of these taxpayers will be allowed to deduct 20% of their qualifying income before figuring their tax bill. For a sole proprietor in the 24% bracket, for example, excluding 20% of income from taxation would have the effect of lowering the tax rate to 19.2%.

The changes to the taxation of pass-through businesses are some of the most complex provisions in the new law, in part because of lots of limitations and anti-abuse rules. They’re designed to help prevent gaming of the tax system by taxpayers trying to have income taxed at the lower pass-through rate rather than the higher individual income tax rate. For many pass-through businesses, for example, the 20% deduction mentioned above phases out for taxpayers with incomes in excess of $157,500 on an individual return and $315,000 on a joint return. At the end of the day, most individuals who are self-employed or own interests in partnerships, LLCs or S corporations will be paying less tax on their pass-through income than in the past.

13.  Popular Deductions Gone:
       Gone are Deductions for:

Moving expenses. Only members of the military can claim it.

All miscellaneous itemized deductions subject to the 2% of AGI threshold, including the write-off for tax preparation fees, unreimbursed employee business expenses and investment fees.

14. Kids’ Taxes:

Under the old law, investment income earned by dependent children under the age of 19 (or 24 if a full time student) was generally taxed at the parents’ rate, so the tax rate would vary depending on the parents’ income. Starting in 2018, such income will be taxed at the same rates as trusts and estates … which will produce a much higher tax bill. The top 37% tax rate in 2018 kicks in at $600,000 for a married couple filing a joint return. That same rate kicks in at $12,500 for trusts and estates . . . and, now, the kiddie tax, too.

15. Affordable Care Act Individual Mandate to Purchase Health Insurance:

      Gone in 2019.

16. 529 Plans:

The new law allows families to spend up to $10,000 a year from tax-advantaged 529 savings plans to cover the costs of K-12 expenses for a private or religious school. Previously, tax-free distributions from those plans were limited to college costs.

17. ABLE Plans:

The law expands the uses of these tax-advantag ed accounts, which allow families to put aside up to $14,000 a year to cover expenses for a beneficiary with special needs. The money can be used tax-free for most expenses, and account assets of up to $100,000 don’t count toward the $2,000 limit for Supplemental Social Security Income benefits. Under the new law, ABLE beneficiaries will be allowed to contribute their own earnings to the account once the $14,000 contribution limit for gifts by others has been reached.

The law also allows parents and others who established a 529 plan for a disabled beneficiary to roll the money into an ABLE account for that individual. However, the rollover would count towards the $14,000 annual contribution limit.

18. 401(k) Loans:

The new law would give employees who borrow from their 401(k) plans more time to repay the loan if they lose their jobs or their plan is terminated. Currently, borrowers who leave their jobs are usually required to repay the balance in 60 days to avoid having the amount outstanding treated as a taxable distribution. Under the new law, they will have until the due date of their tax return for the year they left the job.

About The Author
Named One of the Main Line’s Top Elder Law Attorneys                  

by Main Line Today
Robert M. Slutsky has practiced Elder Law since 1992 and was one of the area’s first elder law attorneys. Rob Slutsky advises clients on Medicaid and Asset Protection Planning, Guardianships, Wills, Trusts, Powers of Attorney, Estate Administration, Special Needs Planning and General Estate Planning. He has represented for profit and non-profit elder care providers and the Pennsylvania Department of Aging. Rob Slutsky has been the solicitor for the Montgomery County Office of Aging and Adult Services, the Area Agency on Aging for Montgomery County, for more than 15 years.