Be Aware of Changes Made to U.S. Tax Laws!
Recently there were substantial alterations made to the U.S. tax code. The Tax Cuts and Jobs Act was ultimately passed and signed in December 2017. It is imperative that you optimize the beneficial changes and minimize the negative changes for your family. This article summarizes how the Act changes some of the most prominent taxation issues affecting you going forward.
The limit on Assets Used in Trade or Business (Section 179) for current-year expense treatment of assets placed in service in a trade or business will be increased to $1M and the phase-out limit will be increased to $2.5M. Bonus depreciation is now set at 100% and notably allows previously used assets to fall within the deduction.
Child care expenses and education savings are very different going forward. The Child Tax Credit doubled from $1,000 to $2,000. The income levels increased as well which provide a greater chance of qualifying for the credit.
Previously clients have asked ONE Advisory Partners what is the best way to pay tuition for K-12 expenses and until now there was not a satisfactory tax-advantaged answer. The 529 funds were primarily restricted for qualifying college tuition and expenses. Now, assets in 529 Plans are available for paying tuition to private, public, or religious K-12 schools in addition to college expenses. Those are enormous changes to the 529 Plan laws! Families can use up to $10,000 per student, per tax year for elementary and secondary schools.
Keep in mind any rich relatives you may have can contribute to a 529 account for your kids and grandkids. Ask a ONE Advisory Partners CFP® professional how to set one up if you haven’t already done so!
Elder care received a boost with a $500 credit for each non-child dependent. Maybe that will make it a smidge easier when your mother-in-law moves in!
Wealth transfer is a subject people begin caring deeply about once they initiate planning for how they want to leave money and other assets to their heirs. Before you go out and spend a bunch of money on a pricey permanent life insurance policy to cover an anticipated estate tax liability, take note that the gift and estate exemptions will be increased all the way up to $11.2 million per person and then indexed for inflation in future years.
The personal income tax brackets still have seven tiers. However, the rates are lower. LLCs and small business owners have probably already had their CPA change tax-withholding amounts to reflect the lower rates. Employees at larger corporations may not see the withholding changes until February 2018. The lower tax rates remain law through 2025. After 2025 the tax rates will go back up to the 2017 rates.
Source: Michael Kitces, Kitces.com/FPAKC18
The standard deduction nearly doubles from $6,350 to $12,000 single filers. The deduction for married and joint filers also meaningfully increases from $12,700 to $24,000. Like the tax brackets, the old 2017 deduction amounts will become effective again in 2026 and beyond.
Depending on the state where you reside, the new rules for state taxes, local taxes, and property taxes may be a huge issue and you need to be smart about it. The deductions remain in place if you itemize your taxes. The deductions are limited to $10,000 for all three combined. It is an aggregate $10,000 in taxes, not $10,000 for each type of state, local, or property tax. If the taxes result from a trade or a business, then the deduction is not capped at $10,000.
If you are living in expensive real estate areas you should take note that the mortgage interest deduction changed. Interest is now only deductible on underlying indebtedness up to $750,000.
The pass-through income deduction may impact those of you who have business owning spouses. Owners of pass-through businesses will be allowed to deduct 20% of “qualified business income” – which is defined as non-wage income (talk to one of our CERTIFIED FINANCIAL PLANNER™ professionals for details how the specific formula works).
Critical Point: the “qualified business income” definition excludes income derived from health, law, accounting, actuarial science, performing arts, consulting, athletics, financial service, and brokerage services. This exclusion may disqualify independent CRNAs from receiving the deduction. However, the deduction will still be available for owners excluded from the definition of “qualified business income” whose taxable income is less than $315,000 for married taxpayers filing jointly or $157,500 for individuals. Higher earning owners of these business may lose the ability to take advantage of this deduction. Definitely double-check with your CPA to see what is best for your situation.
The alternative minimum tax (AMT) still exists but the exemption is going up to $109,400 for joint filers. Heads of households and single filers have an exemption up to $70,300 which is also an increase.
The corporate AMT is eliminated and the corporate tax rate was lowered substantially. The new corporate tax rate is 21% which is way down from the previous 35% rate.
If you are seeking to relocate need to be aware that the moving expense deduction has been eliminated. You can still negotiate to have your moving expenses covered by your new employer, however, benefit will be considered taxable income going forward. There is an exemption for members of the military.