Now that the Tax Cuts and Jobs Act has been signed into law, there are quite a few changes for corporations and individuals. Many of the changes will only be in effect until 2025 and revert back to current law in 2026. Below is a summary of the key points, and what the 2018 tax reform means for you.
There are still seven tax brackets but...
As of 2017, the tax brackets ranged from 10%-39.6%. From 2018-2025, the seven tax brackets will range from 10%-37%.
|Income Tax Rate||Filing As:|
|2017||2018-2025||Single Income||Married/Joint Income|
|10%||10%||$0 up to $9,525||$0 up to $19,050|
|15%||12%||$9,525 up to $38,700||$19,050 up to $77,400|
|25%||22%||$38,700 up to $82,500||$77,400 up to $165,000|
|28%||22%||$82,500 up to $157,500||$165,000 up to $315,000|
|33%||32%||$157,500 up to $200,000||$315,000 up to $400,000|
|33%-35%||35%||$200,000 up to $500,000||$400,000 up to $600,000|
What’s happening with deductions, exemptions and credits?
In examining what the 2018 tax reform means for you, let's start with the standard deduction. In 2017, the standard deduction for a single-income filer was $6,350. Starting this year, that number increases to $12,000. Likewise, for married or joint filers, their standard deduction increases from $12,700 to $24,000. To clarify, if you’re Married Filing Jointly, and your total itemized deductions would be $24,000 or less, you will now be taking the standard deduction.
Personal exemptions are also changing. Before the Act, most could claim $4,050 per personal exemption ($8,100 for a Married Couple) as a separate deduction aside from standard or itemized deductions. This year (2018), that’s no longer an option—personal exemptions have been taken away.
Qualified charitable deductions remain somewhat the same, but with the standard deduction doubling, you’re likely not to get any tax benefits unless you are sure you will be itemizing your deductions, still, with the new standard deduction increase.
Is the AMT gone for good?
The Alternative Minimum Tax was a way to ensure that earners who had a lot of deductions wouldn’t pay too little in income tax when all was said and done. Though there was an attempt to eliminate the AMT completely, it didn’t work. Through 2025, however, it will apply to those with higher income levels.
Mortgage deductions and SALT (State and Local Income Taxes)
If you have a home-equity loan, you can no longer deduct the interest from it. The cap on interest paid on mortgage debt is now $750,000 (down from $1 million). In state and local income taxes, you can only deduct $10,000 of the total combination of your property taxes AND your state and local income tax paid. This will have a great effect on those states with higher income tax rates, i.e. California.
About those corporations…
The maximum corporate tax rate is lowered from 35% from 21% starting this year.
Pass-through small businesses (S-Corps, LLCs, sole proprietorships, etc) used to be treated to the same income tax payment as individual filers. In 2018, however, these small businesses can now deduct up to 20% of qualified business income. Once income reaches $157,500 for singles and $315,000 for married or joint filers, this deduction is phased out.
For depreciable assets, companies can now deduct costs in one year instead of amortizing the cost over several years. These are only valid for equipment purchased after September 27, 2017 and before January 1, 2023.
It’s likely that you won’t see any of these changes take effect on your paycheck until February of this year. As you are looking toward your financial goals in 2018 and wondering what the 2018 tax reform means for you, make sure you talk to your Financial Advisor if you still have questions.
Whether you are planning for the future or need help now, Chatterton & Associates is here to help you make your financial lives easier. Contact us today to learn more about how we help people.
Chatterton & Associates, The Wealth Management Team, Inc.