The Tax Cut and Jobs Act (“TCJA”) made many changes affecting individual taxpayers

Individual, Taxes

Tax rates

  • The TCJA changed the tax rates and ranges of the seven brackets and lowered the top bracket to 37% from 39.6%
  • The long-term capital gains and qualified dividends rate is still 0% if in the lowest two brackets, 15% for income up to between $425,800 and $479,000 depending on filing status, and 20% for income above those amounts
  • Gain on collectibles is still taxed at 28% (art and coins)
  • Depreciation recapture is still taxed at 25%
  • Net investment income unchanged, 3.8% on investment income above $250,000
  • Alternative minimum tax (“AMT”) exemption amount increased to $109,400 for married filing joint taxpayers and this exemption does not phase out until income exceeds $1,000,000

Standard deduction and exemptions

  • The TCJA eliminated the deduction for personal and dependent exemptions (was $4,050 each in 2017)
  • The Standard Deduction is increased from $6,350 to $12,000 for single taxpayers and from $12,700 to $24,000 for married taxpayers filing jointly

Schedule A – itemized deduction changes

  • All taxes which include state income tax or sales tax, real estate taxes and personal property taxes (NV DMV) are limited to $10,000
  • Mortgage interest expense deduction is limited to interest paid on a mortgage up to $750,000 unless grandfathered in (incurred before December 15, 2017)
  • Home equity interest expense deduction is repealed and is no longer deductible unless was used to acquire or improve the residence which it is secured by, and is less than the $750,000 total mortgage limit
  • Donations are now deductible up to 60% of your income, up from 50%, and any amounts that exceed the 60% can be carried forward for the next five years
  • Donations to colleges and universities for ticket or seating rights at sporting events are no longer deductible
  • Miscellaneous itemized deductions are gone
    • These included union dues, employee business expenses, moving expenses, job hunting expenses, tax preparation fees, attorney fees and investment advisory fees are the most common of these deductions
    • Also included in this category are hobby expenses
      • Hobby income is taxable
      • Prior to TCJA, the expenses, to the extent  of the hobby income, was deductible on Schedule A as a miscellaneous itemized deduction

Changes effecting dependents

  • Child tax credit
    • Credit is increased to $2,000 per qualifying child (under age 17) and does not phase out until $400,000 of income for married filing jointly taxpayers
    • $1,400 of the credit is refundable
    • New $500 non-refundable dependent tax credit for qualifying dependents (children age 17 and over and qualifying relatives)
  • Kiddie Tax
    • Trust tax brackets are now used to compute the child’s tax instead of the parent’s bracket
    • The trust tax rates get to the highest 37% bracket with only $12,501 of income
    • Capital gain rate is 15% for income over $2,600 and 20% if over $12,700
    • Applies to children with investment income in excess of $1,050
  • 529 Plan changes
    • You can now take qualifying distributions from 529 plans for K-12 religious and other private schools, not to exceed $10,000 per beneficiary per year

New deduction for Qualified Business Income (“QBI”) from pass-through entities

  • 20% deduction for individuals, trusts and estates with QBI from partnerships, limited liability companies, S corporations, sole proprietorships and certain rental real estate activities
  • QBI is determined separately for each qualified business
  • Gains and losses, interest and dividends not properly allocable to the trade or business is not QBI
  • QBI does not include the wages or guaranteed payments paid to the taxpayer from the qualified business
  • Overall limit of 20% of the taxpayer’s taxable income in excess of any net capital gains
  • May be limited by wage and capital and or if in a “specified service trade or business”
  • If taxpayers taxable income is under $157,500 for a single taxpayer or $315,000 for a married taxpayer filing jointly the 20% QBI deduction is not limited
  • If taxpayers taxable income is above $157,500 but below $207,500 for a single taxpayer or $315,000 but below $415,000 for a married taxpayer filing jointly, the 20% QBI deduction is limited
  • If taxpayers taxable income is above the higher threshold of $207,500 for a single taxpayer or $415,000 for a married taxpayer filing jointly, and the QBI is from specified services, the 20% QBI deduction is not allowed
  • If taxpayers taxable income is above the higher threshold of $207,500 for a single taxpayer or $415,000 for a married taxpayer filing jointly, 20% QBI deduction is limited by a W-2 wage and capital limitation
  • Specified service trade or business includes any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or where the principal asset is the reputation or skill of one or more of its employees
  • W-2 wage and capital limitation is the greater of 50% of the W-2 wages for the business or 25% of the W-2 wages plus 2.5% of the business’s unadjusted basis in all qualified property
  • Qualified property is depreciable property held and used by the business for which the depreciable period has not ended
  • The depreciable period is 10 years
  • The basis of qualified property is the acquisition cost

Changes to net operating losses (“NOL”)

  • Net operating losses are where your losses for the year exceeds all your other income sources
  • Prior to TCJA, losses first offset the current year income, then could be carried back two years and forward twenty years
  • You can no longer carry losses back
  • Can only offset up to 80% of the taxable income for the year the NOL is carried to
  • Any unused losses carry forward indefinitely

Other 2018 notable amounts:

  • 401K maximum salary deferral $18,500
  • 401K additional catch-up contribution (those age 50 and older) $6,000
  • SIMPLE maximum salary deferral $12,500
  • SIMPLE additional catch-up contribution $3,000
  • IRA maximum contribution $5,500
  • IRA additional catch-up contribution $1,000
  • Estate tax exclusion amount $11,200,000
  • Gift tax exclusion $15,000
  • Standard mileage rate for business 54.5 cents per mile
  • Standard mileage rate for charitable 14.0 cents per mile
  • Standard mileage rate for medical 18.0 cents per mile

Planning ideas:

  • Know your expected capital gains and discuss with your investment advisor capital losses you might be able to take to offset the income (remember the wash sale rules – you cannot buy the same or similar stock back for 30 days)
  • Consider the capital gains in mutual funds and think about selling them before the income distribution date, usually near the end of year
  • Give away highly appreciated stock to avoid the taxation on the gain but still get the charitable donation (if itemizing)
  • Make charitable donations directly from your required minimum distribution

Health insurance “Shared Responsibility” penalty goes away but not until 2019 so if you did not have insurance in 2018 and do not meet any of the exceptions you will still have the penalty

The tax forms will look very different this year.  Here a link to a draft of the form https://www.irs.gov/pub/irs-dft/f1040–dft.pdf.   There will be many schedules to support this brief form.

If you would like to meet to discuss how these changes impact you and what you can do before year end please call the office for an appointment.