As a result of new tax legislation that Congress passed in December of 2017, referred to as the Tax Cuts and Jobs Act (TCJA), significant changes have come into effect for 2018 and later years. TCJA made significant changes to both individual and corporate taxes. Most of the provisions relating to individuals are set to expire on December 31, 2025. The corporate tax changes are permanent.
Tax planning continues to be an ongoing process. Your situation can change during the course of a year and you should react accordingly. Marriage, divorce, death, a change in job, or loss of a job, and retirement are just some of the life events that trigger a special urgency for tax planning.
Individual income tax brackets for 2018
The Act retains seven tax brackets, but with different rates and break points. The tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
For married filing jointly the amount is $24,000. For single the amount is $12,000. For head of household the amount is $18,000. Individuals 65 years of age or older and blind individuals, are allowed an additional $1,300 per person.
The Act pares back or eliminates many deductions. Home mortgage interest can be deducted up to $750,000 of new acquisition indebtedness on a primary or secondary residence. This is a decrease from the previous $1 million. The new debt limitation generally applies to debt incurred after December 14, 2017. No deduction is allowed after 2017 for interest on existing or new home equity loans unless used for acquisitions and/or home improvements. The state and local tax deduction is now limited to $10,000 for married joint filers and $5,000 for married filing separately. The limit applies to the cumulative total of income and property taxes. Sales taxes can also be deducted but are subject to the new limit. Miscellaneous deductions subject to the 2% of AGI threshold are eliminated, including employee business expenses, investment fees, brokerage fees, hobby expenses, tax preparation costs, theft losses, personal casualty losses (excluding declared disaster areas), and alimony for post 2018 divorce decrees. The charitable contribution deduction is preserved, but with some minor changes. The medical expense deduction is preserved.
Itemized deduction limitations
The phase-out is eliminated under the Act.
The personal exemption and the phase-out levels are eliminated under the Act.
Inflation indexing of income tax brackets and various other tax benefits is altered
A chained consumer price index (CPI) will be used to determine inflation adjustments for many breakpoints, limits and deductions, resulting in lower inflation adjustments and thus smaller annual increases than with the pre-2018 index (traditional CPI).
The Affordable Care Act requiring adults and children to have minimum essential health coverage is repealed for post 2018 years. The mandate continues to apply for 2018.
The rules regarding IRA rollovers have changed
Beginning in 2015, taxpayers may only make one IRA-to-IRA transfer in any twelve month period. However, trustee-to-trustee transfers between IRAs are not subject to this limitation. Rollovers from traditional IRAs to Roth IRAs are not limited.
Minimize tax on Social Security benefits
When Social Security recipient’s modified adjusted gross income (MAGI) plus 50% of Social Security benefits exceed certain base amounts, the benefits can be taxable. The MAGI thresholds are $25,000 for singles and $32,000 for marrieds filing jointly. If your income will be close to these thresholds you should consider deferring income, if possible, to avoid tax on the benefits.
Roth recharacterizing and conversions
As a result of the Act, beginning in 2018 the ability to recharacterize a Roth IRA has been repealed. But Roth conversions remain in the law. If you have not yet made a Roth conversion, doing so prior to year-end 2018 might be an opportunity worth serious consideration. Variables include your present income tax bracket, how close you are to retirement, and your access to other funds both to pay the conversion tax and to delay distributions from your Roth account later.
Maximize retirement plan opportunities
Generally, the tax benefits for retirement plans have not been curtailed. In 2018 you can contribute up to $18,500 to your 401(k), 403(b), and 457 plans if you are under age 50. If you will be age 50 by year end 2018 you can add an additional $6,000. If you are already on track to max out your contribution for the year, you may also qualify for a contribution to a traditional IRA or Roth IRA. The maximum contribution is $5,500, plus another $1,000 if you are age 50 or older by year end. If you are no longer contributing to a retirement account and instead getting ready to transition from working to retirement, now is an opportune time to determine which assets and benefits you will be drawing from, including establishing the timing of your distributions and determining when to begin receiving Social Security benefits.
Alternative Minimum Tax (AMT)
The AMT has been retained, but with increased exemption amounts and increased phase-out zones. The exemption amounts and phase-out levels have been permanently adjusted for inflation.
Capital gain rates
Capital gain rates remain the same for 2018. Your capital gain rate depends on your tax bracket and the character of the gain. Therefore, the rate can be 0%, 15%, 20%, 25%, or 28%. There may also be a 3.8% net investment income (NII) tax levied on top of those rates. Now is a good time to review the current status of your capital assets (not exclusively, but primarily investable assets that would be subject to taxation if sold at a gain). Time the recognition of capital gains and losses during the year to minimize your net capital gains tax and maximize deductible capital losses. Unfortunately, many investors still have excess capital losses from past stock market declines that they may “carry over” to offset capital gains that would otherwise be taxable.
For calendar year 2018, the employee-share of OASDI tax is 6.2 percent up to the Social Security wage base of $128,700 and the Medicare tax is 1.45% with an unlimited wage base.
Also, beginning on January 1, 2013 there is a 0.9% Medicare surtax on earned income and remains in effect for 2018. The surtax applies to wages and self-employment income. It applies to single filers and heads of household when total earnings exceed $200,000 and $250,000 for married filing jointly taxpayers. For earnings over the thresh-hold, the effective Medicare tax will be 3.8%, the usual 2.9% tax rate, plus an extra 0.9%. The surtax only applies to the employee’s share of tax, employers do not owe the tax.
Under the Act, casualty losses have been repealed. However, the deduction for casualty losses from a federally declared disaster area have been retained. Also, you can elect to treat the loss as having occurred in the year immediately preceding the tax year in which the disaster occurred, and you can deduct the loss on your return or amended return for that preceding tax year. The election gives taxpayers the opportunity to maximize their tax savings in the year in which the savings will be greatest.
Payroll withholding/Estimated tax payments
Especially for 2018, everyone should determine if their payroll withholding and/or estimated tax payments are adequate for the year to ensure that they cover the required amount of payments in order to avoid underpayment penalties, or to ensure that they are not significantly overpaid for the year.
Estate tax/Gift tax
Under the Act, the estate tax has been retained, but with greater exemption amounts. Also, the current estate tax rate is retained at 40 percent and the exemption amount has been increased to $10 million, indexed for inflation. As a result, the exemption amount for 2018 is $11.2 million per spouse. The exemption amount is portable, meaning that if one spouse passes away, the surviving spouse can claim the exemption. This results in a total effective exemption amount of $22.4 million in 2018. Lifetime gift-giving, ideally on an annual basis, should continue to form part of a master estate plan. The annual gift tax exclusion per donee on which no gift tax is due has increased to $15,000 for 2018 with $30,000 allowed to each donee by married couples. Making a gift in 2018 to take advantage of this annual, per-donee exclusion should be considered by anyone with even modest wealth.
Corporate tax rates
Under the Act “C corporations” beginning in 2018 will pay a flat rate of 21%, down from 35%. The corporate AMT has been repealed beginning in 2018.
Pass through entities
Beginning in 2018 new rules apply to sole proprietors, owners of “S corporations,” partners in partnerships, Limited Liability Company (LLCs) owners, Real Estate Investment Trust (REIT) shareholders, and partners in publicly traded partnerships. They can generally deduct 20% of qualified business income. There are many limits and restrictions. The deduction phases out for higher income taxpayers in certain fields such as health, law, accounting, financial services, performing arts, consulting, or any business where the principal asset is the reputation or skill of its employees. And there is a W-2 wages paid limitation for high-income individuals that applies even if the person is not engaged in a specified service business.
Under the Act, previously untaxed accumulated overseas earnings are taxed at the rate of 15.5% on foreign cash and liquid assets and 8% on other reinvested profits.