2018 Tax Reform Bill — Important Changes to Understand

When the new tax law was passed, there were several changes made that every taxpayer should be aware of. First off, the “Tax Cuts and Jobs Act” does not affect your 2017 taxes. However, the reform bill could significantly affect your tax situation for 2018. Below are some of the most importance changes that you should be aware of.

Alternative Minimum Tax

The alternative minimum tax (AMT) was originally put into affect to ensure that high-income households paid their fair share of taxes. The AMT requires many filers to calculate their tax bill twice — once using the rules of the regular income tax code and once under the rules of the AMT code. The taxpayer then must pay whichever is higher.

Taxpayers need to calculate their AMT if their adjusted gross income (AGI), which is a taxpayer’s total gross income minus specific deductions, exceeds the AMT exemption levels below:

The increase in the exemption level will dramatically decrease the number of taxpayers subject to the AMT.

Under the Tax Cuts and Job Acts, the Corporate AMT, applicable to corporations, has been eliminated.

Standard Deductions in New Bill

The standard deduction allowable on your tax return will change when you file your 2018 return. Before the tax reform bill, taxpayers who were single, or married filing separately were entitled to a standard deduction of $6,500. That amount is increased to $12,000 for the 2018 tax year and will remain the same through 2025 if no additional tax bills alter the plan. Married taxpayers who are filing a joint return will enjoy an increase from $13,000 to $24,000 and heads of household filers will get the benefit of an increase from $9,550 to $18,000.

Tax Bracket Changes

While there was a great deal of discussion about reducing the number of tax brackets, there are in fact still seven different tax brackets, the same number there were before the tax bill passed. While the numbers of tax brackets have remained the same, the percent of tax that will be owed has changed for most taxpayers.

Comparing Previous Brackets to New Brackets

Mortgage Deductions

Homeowners have enjoyed the ability to deduct their mortgage interest from their taxes for several years. The new tax bill made some dramatic changes to this deduction, primarily allowing deductions only up to $750,000 loan balances if the loan was taken out after December 14, 2017. For those who had a mortgage prior to that date, the limit remains at $1,000,000.

Major Changes to State and Local Tax Deductions

One of the more controversial parts of the new tax bill is the changes to state and local tax (SALT) deductions. Previously, taxpayers were allowed to claim all property taxes paid to state and local governments as an itemized deduction. Now, taxpayers may only deduct a maximum of $10,000 for SALT, which may be significantly lower than what they are currently allowed to deduct under the new law. This is especially true in high-tax states such as New York, New Jersey, Connecticut, Maryland and California.

Child Tax Credit

The tax reform bill doubles the amount of Child Tax Credit a family can claim from $1,000 to $2,000 for each qualifying child who is under the age of 17 at the end of the tax year. It is important to note that since this is a tax credit and not a deduction, it will reduce your final tax bill instead of reducing the amount of income that is subject to tax.

Previously, the child tax credit only applied to single filers who earned $75,000 and joint filers who earned $110,000. Under the new tax law, single filers may earn up to $200,000 and joint filers may earn up to $400,000, and still take advantage of the tax credit.

Alimony Changes

Divorced taxpayers with alimony obligations were never able to deduct the amounts paid. However, under the new tax reform bill, those who are paying alimony are entitled to deduct the full amount paid. The taxpayer receiving alimony will now be required to include the full amount as part of their overall income. This is a significant change as in prior years, the person paying could not deduct alimony and the person receiving payments was receiving these amounts tax-free.

Estate Tax Changes

Previously, there was an estate tax exemption that applied to estates valued at $5 million per individual. The new tax law increases this amount to $11.2 million per individual and $22.4 per couple for 2018 and is expected to remain the same through 2025.

For many taxpayers, the differences can be overcome by changing their deductions on their Form W-4 with their employer. This can help ensure you will not be facing an additional tax burden when filing your 2018 taxes during 2019.

Business Tax Changes

Some of the most dramatic differences with the new tax bill apply to businesses. Rather than graduated taxes ranging between 15 percent and 35 percent, corporations will now pay a flat tax of 21 percent. In addition, the corporate Alternative Minimum Tax (AMT) has been repealed. Businesses also get a new break on “pass through” income which is particularly helpful to small business owners who earn income through LLCs and S-Corporations. New rules also impose new restrictions on like-kind exchanges (1031s) and allow more generous depreciation for new equipment put into use.

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