Everything You Need to Know: Tax Reform Updates for 2018

On Dec. 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law. Financial experts and legislators maintain that the law represents the most comprehensive tax reform in three decades. Here are some highlights of the benefits the new tax law provides to individual taxpayers and businesses.

• New marginal tax rates. The 2017 rates were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The new 2018 rates will be 10%, 12%, 22%, 24%, 32%, 35%, 37%. The majority of taxpayers will have a lower tax bill.
• The marriage penalty is rescinded for all but the highest income levels. For married couples, the income threshold levels at each marginal rate (except 37%) will double those for individual filers. Why this is important: In 2017, two single individuals who each earned $90,000 would be taxed at a marginal tax rate of 25% each. However, if the two filed as “married filing jointly,” their combined income of $180,000 would put them at the 28% tax bracket. The doubling of all income threshold levels below the 37% tax bracket eliminates the marriage penalty for this couple. In 2018, they will only pay a 24% marginal tax rate.
• All standard deductions are doubled for 2018. In 2017, the standard deduction for a single individual was $ 6,350; in 2018, it will be $12,000. Married couples who file separately will enjoy the same increased standard deductions. Meanwhile, married couples who file jointly will see their standard deductions double from $12,000 to $24,000.
• The progressive C corporation tax rates are rescinded for 2018. In its place is a flat rate of 21%.
• Unlike individual AMT, the 20% corporate AMT will be repealed for 2018. However, the TCJA protects middle income taxpayers by increasing individual exemption amounts. A married couple filing jointly will see their exemptions increase from $86,200 to $109,400. The phaseout threshold for married couples is also being raised from $164,100 to $1,000,000. Meanwhile individual taxpayers will see their exemptions increase from $55,400 to $70,300. For them, the phaseout threshold is set to increase from $123,100 to $500,000.
• New Section 199A pass-through deduction. Sole proprietorships, partnerships, S-corporations, estates, and trusts can now claim up to 20% of QBI (qualified business income) on their taxes.

The above constitutes just a few of the changes taxpayers and businesses will see for the 2018-2019 tax period. In September 2018, Congress proposed three more bills as a vehicle for Tax Reform 2.0. These bills are the Protecting Family and Small Business Tax Cuts Act of 2018, the Family Savings Act of 2018, and the American Innovation Act of 2018.

The first of the three bills aims to make the TCJA small business tax cuts permanent. Right now, they sunset in 2025.

Meanwhile, a key part of the second bill supports the creation of a Universal Savings Account, similar to ROTH IRAs. If this bill passes, taxpayers will be able to contribute up to $2,500 of after-tax income (annually) to their accounts. Most importantly, there will be no restrictions on how or when withdrawals can be made; taxpayers will have funds to draw on during personal emergencies.

The proposed Family Savings Act of 2018 will also deliver another first: Families will be allowed to withdraw up to $7,500, penalty-free, from their retirement accounts for expenditures related to a new child. It appears that congressional focus on our national welfare is warranted. With declining U.S. fertility rates and increased adult life spans, the sustainability of Social Security is at stake.

The last of the three bills is aimed at increasing innovation and business investment. If the American Innovation Act passes, new business owners will be able to deduct up to $20,000 of start-up and organizational expenditures from their tax bill.

At present, the three bills have cleared the House of Representatives and are awaiting votes in the Senate. Should the bills become law, taxpayers stand to gain considerable tax advantages. On the other hand, new laws can add extra layers of complexity to the tax filing and planning process. At Barnes Wendling, our CPAs are uniquely positioned to address your concerns.

When the provisions of the TCJA go into effect in 2018, we can:

• Answer questions about the new Section 199 A deductions for pass-through businesses. We can calculate what your qualified business income (QBI) will be and help you determine the correct tax planning strategies to maximize the deduction.

• Help you navigate the new bonus depreciation and Section 179 equipment deduction rules and the expanded definitions of both.

• Verify which itemized deductions have been eliminated and show you how the elimination of personal exemptions will be reflected in your return.

• Provide you an accurate estimate of your tax liabilities in the face of the new $10,000 deduction limit for state and local taxes.

• Familiarize you with the new child tax credit provisions.

• Address your concerns about the AMT and how the new individual exemption thresholds will affect you.

Each year, many Americans scramble for answers during tax-filing season. No wonder, as the federal code is now about 75,000 pages long. Tax preparation and financial planning should not be a stressful experience. Our CPAs are ready to answer your questions and address your unique concerns. If you’d like more information, download our new webinar about the TCJA and Tax Reform 2.0.