The President has signed the biggest tax reform law in over 30 years. When you file your 2018 tax returns – about a year from now – your tax return will look very different. And because most changes don’t happen until then, we have some time to learn about the changes and plan for next year. Here are a few of the biggest changes that may affect you.
Tax rate changes: Both individual and corporate rates have changed. The maximum individual rate is reduced to 37% and the corporate rate is now a flat 21%.
Standard deduction increases: Previously this amount was $13,000 for married filing joint returns; under new law, the amount is $24,000 for MFJ. However, there are no more personal exemption deductions allowed. So, this may help you – or hurt you.
Disappearing personal deductions: Beginning with the 2018 tax year, you will no longer be able to deduct:
Increased Child Tax Credit and new Dependent Credit: The credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non-child dependent can now receive a new credit of $500. But you will have no exemption credit or deduction for yourself, your spouse, or your dependents.
The phaseout thresholds for these credits are drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
Some new benefits for individuals include:
Small business benefits:
Deduction for Pass-Through Income
Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity. The rules are incredibly complex but there is a lot of planning that we can do to maximize this deduction for you.
Increased Write Off for Purchases of Property and Equipment
A taxpayer may expense up to $1 million of qualifying property (i.e. equipment and other tangible property used your business, computer software and certain real property improvements) placed in service starting January 1, 2018. The deduction phases out at total property purchases exceeding $2.5 million.
Meals and Entertainment Limits
Through 2017, businesses can deduct up to 50% of meals & entertainment expenses. Under the new law starting January 1, 2018, deductions for entertainment expenses are disallowed. But you still get the 50% deduction on business meals.
California does not conform to the above changes (yet), meaning the State still allows the 50% deduction for entertainment expenses in 2018; however, we expect California will restrict the deductions to match federal before the end of the year. As always, for any deductions, you must have the proper records, which include statements, receipts or logs of the amount, time and place (or dates of travel), business purpose and relationship to the taxpayer.
These are the most common changes, and at your tax interview this year we will discuss any other changes that might affect you. As these changes are not simple, we suggest a separate appointment to go over those that apply to your situation and to talk about how to maximize your tax benefit.
Look for additional newsletter updates in the weeks to come.