Individual Tax Planning for 2017 Tax Reform

On Behalf of | Jan 12, 2018 | News & Events

The tax reform legislation recently passed by Congress significantly changes the landscape for individuals beginning January 1, 2018, and continuing for many years come. Due to the elimination or limitation on itemized deductions, and the elimination of personal exemptions, a key consideration in planning for 2018 is to first look at ways to lower your taxable income. You should thus consider maximizing all pre-tax contribution opportunities such as your 401(k), maximizing deductible IRA contributions, and consider investing in state and municipal bonds (whose interest is exempt from federal tax). Also see our separate article on the new 20% deduction for pass-through entities income and the continued advantages of the use of pass-through entities.

Highlighted below are some of the more significant changes made by the reform legislation and possible challenges and opportunities to lower your tax bill for the 2018 and beyond.

Lower Individual Tax Rates – The legislation creates lower individual tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate from 39.6% to 37%, respectively. (The current rates would be restored in 2026, i. e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively).

Increase in the Standard Deduction – Beginning in 2018, the standard deduction increases significantly from $12,700 to $24,000 for joint filers, from $9,350 to $18,000 for head of households, and from $6,350 to $12,000 for singles. Since you can claim the higher of the standard deduction or itemized deductions, you will want to closely to compare the two methods as you may now benefit from a higher standard deduction given the many changes to itemized deductions.

Elimination Of Personal Exemptions In exchange for lower tax rates and increase in standard deduction, personal exemptions no longer may be claimed beginning in 2018.

Modification of the Alternative Minimum Tax (AMT)The legislation retains the AMT for individuals but increases the exemption amount and phaseout thresholds so fewer people will pay it. From 2018 through 2025, a higher AMT exemption will apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption will phase out at $1 million for joint filers and $500,000 for other taxpayers. The threshold will be adjusted for inflation.

$10,000 Cap on State and Local Tax Deduction In a significant departure from prior law, the legislation will allow individuals to deduct no more than $10,000 of any combination of the following taxes – state and local income taxes, state and local property tax, and sales tax. This overall limitation may result in the enhanced standard deduction yielding a larger deduction against your adjusted gross income and that’s a lower tax bill.

Limits on Mortgage Interest Deduction The tax reform act reduces the amount of mortgage indebtedness on which taxpayers may deduct interest to $750,000 for mortgages and curd after December 15, 2017. (The $1 million limitation remains for older debt). Interest on your principal residence and a second home are deductible. Importantly, however, beginning in 2018, interest on your home equity indebtedness no longer is deductible, regardless of when it was incurred. You may want to consider refinancing your home equity line into a single mortgage on your principal or second home in 2018 assuming that your combined mortgage interest in other permitted itemized deductions exceeds the standard deduction.

Medical Expense DeductionIndividuals may continue to deduct medical expenses in 2018 and 2019 if the expenses exceed seven and a half percent of adjusted gross income. The threshold returns to 10% of the adjusted gross income in 2019. Again, you will need to review weather claiming such expense, when combined with other allowable itemized deductions yield a higher deduction than the standard deduction.

Elimination of Deduction for Unreimbursed Employee Business ExpensesThe reform act eliminates the deduction for miscellaneous itemized deductions through 2025. Thus deductions (subject to the 2% floor of adjusted gross income) for cost related to the production or collection of income, such as appraisal fees, investment fees, and safety deposit box rent are now non-deductible, and, importantly, expenses related to employment, such as uniforms, professional societies, computer used for work, and job-hunting expenses also are non-deductible. Employees who in incur significant unreimbursed business expenses may want to ask an employer about adjusting their compensation or establish an accountable expense reimbursement plan that would allow for the employer to reimburse the employee tax free while also in titling them to a deduction against their business income.

Child and Dependent Credits From 2018 through 2025, the reform legislation increases the value of the child tax credit to $2,000 per child under 17 from $1,000. As much as $1,400 of the credit will be refunded, thus allowing recipients to benefit even if they don’t owe taxes. You will need to provide your child social security number to claim the refundable portion through 2025. The refundable portion of the credit will be indexed for inflation. The legislation also expands eligibility for the credit by increasing the phaseout threshold to $400,000 of the adjusted gross income for the joint filers (up from $110,000 under current law), with a threshold for all other filers set at $200,000. A $500 non-refundable credit for dependents other than children will be available through 2025, (and no social security number is required).

Give us a call today and speak with Richard L. Robertson about your taxes!