On December 22,
Here is an overview of some of the key changes affecting individual and business taxpayers.
The TCJA includes significant changes for individual taxpayers, most of which take effect for 2018 and expire after 2025. Here are some of the most notable changes.
Tax rates, brackets and inflation adjustments
The TCJA maintains seven income tax brackets but temporarily adjusts the tax rates as follows:
PERSONAL EXEMPTIONS and STANDARD DEDUCTION
Remember, in 2017, taxpayers could claim a personal exemption of $4,050 for themselves, their spouses and any dependents. Additionally, they could either itemize deductions or take a standard deduction based on their filing status: $6,350 for singles and married couples filing separately; $9,350 for
For 2018–2025, the TCJA suspends personal exemptions but roughly doubles the standard deduction as follows: Singles – $12,000, Married Filing Jointly and/or Qualifying Widow – $24,000, Married Filing Separately – $12,000 and Head of Household – $18,000. The standard deduction amounts will be adjusted for inflation beginning in 2019.
For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from the child tax credits.
CHILD TAX CREDITS
Tax credits are especially valuable because they reduce your tax bill dollar-for-dollar, rather than just reducing the amount of income subject to tax like deductions do. Beginning in 2018, the TCJA doubles the child credit to $2,000 per child under age 17. The maximum amount refundable (because a taxpayer’s credits exceed his or her tax liability) is limited to $1,400 per child.
The TCJA also makes the child credit available to more families than in the past. Under the new law, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000.
Beginning in 2018, the TCJA also includes a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child or elderly parent).
These provisions all expire after 2025.
Above-the-line deductions are deductions you can take even if you don’t itemize. They are subtracted from your income to determine your adjusted gross income (AGI). AGI affects eligibility for many tax breaks and can trigger certain taxes. The TCJA makes some significant changes to two above-the- line deductions:
- 1. Moving expenses. The deduction for work-related moving expenses is suspended for 2018–2025, except for active-duty members of the Armed Forces (and their spouses or dependents) who move because of a military order that calls for a permanent change of station. (For 2018–2025, the exclusion from gross income and wages for qualified moving expense reimbursements is also suspended, again except for active-duty members of the Armed Forces who move pursuant to a military order.)
- 2. Alimony payments. For divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. Because the recipient spouse would typically pay income taxes at a rate lower than that of the paying spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.
When you file your tax return, you can either claim the standard deduction or you can itemize deductions. The TCJA limits or suspends many itemized deductions. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. With the
Take a closer look at the TCJA changes to itemized deductions:
- State and
localtax deduction. The deduction for state and local taxes had been proposed for elimination under tax reform. It survived but has been scaled back substantially. For 2018–2025, taxpayers can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and either income or sales taxes.
- Mortgage interest deduction. The TCJA tightens limits on the deduction for home mortgage interest. For 2018–2025, it generally allows a taxpayer to deduct interest only on mortgage debt of up to $750,000. However, the limit remains at $1 million for mortgage debt incurred before December 15, 2017, which will significantly reduce the number of taxpayers affected.
- Home equity interest deduction. The new law suspends the deduction for interest on home equity debt for 2018–2025. However, home equity debt interest might still be deductible if the funds are used for a purpose where interest otherwise may be deductible, such as for home-improvement, investment or business purposes. The rules are complex and the new law is still being interpreted.
- Medical expense deduction. Qualified medical expenses are deductible only to the extent they exceed the applicable AGI threshold. The TCJA reduces the threshold from 10% of AGI to 7.5% for all taxpayers for both regular and AMT purposes in 2017 and 2018.
- Miscellaneous itemized deductions subject to the 2% floor. This deduction for expenses such as certain professional fees, investment expenses
andunreimbursed employee business expenses is suspended for 2018–2025. If you’re an employee and work from home, this includes the home office deduction.
- Personal casualty and theft loss deduction. For 2018–2025, this deduction is suspended except if the loss was due to an event officially declared a disaster by the President.
- Charitable contribution deduction. For 2018–2025, the limit on the deduction for cash donations to public charities is raised to 60% of AGI from 50%. However, charitable deductions for payments made in exchange for college athletic event seating rights are eliminated.
- Elimination of the AGI-based reduction of certain itemized deductions. Under pre-TCJA law, if your AGI exceeded the applicable threshold, certain deductions were reduced by 3% of the AGI amount over the threshold (not to exceed 80% of otherwise allowable deductions). For 2018–2025, t
THE AFFORDABLE CARE ACT (ACA)
You may have heard that tax reform eliminated the Affordable Care Act (ACA) individual penalty, but it’s important to note that the removal of the so-called healthcare tax penalty starts with 2019 tax returns filed in 2020. Here are some details:
Under the Affordable Care Act, taxpayers who do not have minimum essential health insurance coverage or qualify for an exemption were required to pay a penalty on their tax return. IRS data shows at least 4 million taxpayers paid the healthcare penalty for tax year 2016, and at least 5.6 million paid the penalty for tax year 2015.
For tax years 2016, 2017, and 2018, the healthcare tax penalty is the greater of $695 per individual (up to a maximum of $2,085) or 2.5% of household income, less the taxpayer’s filing threshold amount
The IRS receives information about health coverage from health insurers and employers. These groups send Form 1095-A, Form 1095-B, and Form 1095-C to taxpayers and the IRS. These forms show who was covered and also let the IRS know if coverage lasted all year or part of the year.
PLEASE NOTE: Even though the individual penalty is eliminated beginning with tax-year 2019 returns filed in 2020, taxpayers will continue to receive Forms 1095-A, 1095-B, and 1095-C with information about their coverage. Taxpayers should keep these forms with their tax returns. Taxpayers who purchased coverage through the Marketplace will continue to use information reported on Form 1095-A to calculate the premium tax credit; taxpayers who received an advance premium tax credit are required to reconcile information from Form 1095-A on their tax returns.
The Tax Cuts and Jobs Act provides businesses with a variety of changes in tax reporting starting with tax-year 2018. One such change in the latest tax reform is the 20% deduction for pass-through entities’ qualified business income.
The qualified business income deduction starts in tax year 2018 and, as of now, ends after tax year 2025.
What is a Pass-Through Entity?
A pass-through entity is a business entity that passes through its income to the owners of the business. The owners then report the business income on their personal returns. Generally, pass-through entities include partnerships and S corporations, but the qualified business income deduction also applies to other unincorporated entities such as sole proprietorships and single-member LLCs.
How Does the Qualified Business Income Deduction Work?
Business owners can deduct up to 20% of their qualified business income or, if lower, 20% of their taxable income net of any capital gain. This deduction is claimed on the business owner’s individual return.
Generally, qualified business income refers to the business’s profits. Qualified business income does not include salary or wages paid to the taxpayer either as W-2 wages from a S corporation or guaranteed payments from a partnership.
This basic formula applies if the taxable income business owners report on their individual returns does not exceed certain thresholds. The thresholds for taxable income are $157,500 for single filers and $315,000 for people filing joint returns. The numbers will be adjusted for inflation after 2018.
If taxable income does exceed these thresholds, the deduction factors in limitations relating to the wages the business pays to its employees and depreciable assets the business owns. And, for certain businesses that provide services such as law firms, accounting firms, and doctors’ offices, the limitations are steeper and the deduction is phased out altogether when taxable income reaches $207,500 ($415,000 for joint filers).
A couple of important things to keep in mind – the latest pass-through business tax reform reduces federal income tax but does not reduce self-employment taxes for income from partnerships and sole proprietorships, or income for purposes of the alternative minimum tax.
The tax benefits available for education are different depending on whether the taxpayer is currently attending college, liable for student loan payments, or saving for college. Because the tax reform changed a few, but not all, of the existing education benefits.
Education Tax Credits, Deductions and Benefits for Students in College in 2018 and Beyond
For students who are currently in college. Tax reform did not education tax credits for 2018 or future years, such as the American Opportunity Credit and the Lifetime Learning Credit.
Due to the Bipartisan Budget Act of 2018, – not the TCJA – the tuition and fees deduction was extended. The extension is through 2017, but it’s unknown if other legislation will extend the tuition and fees deduction for 2018.
There is more but that’s it for now.
Now is the time to Plan! Now is the Time to Act!
The 2016 tax season is here. Filing your taxes for 2016 year will become infinity easier if you understand the changes that the IRS has put in place for the calendar year. Below, is all the information you will need to know about the changes that have been made, the resulting benefits due and any increase in tax benefits. For example, are you planning to get married in 2016? Did you know that even if you get married on December 31, 2016, you can still file “Married Filed Joint” just as if you were married the whole year? Why is this important to know? Because the tax table is structured differently for a married couple. It is not as if you can just double the rates for the Single category. You may have to make adjustments in your withholding or find yourself with a balance due. Are you expecting a child in 2016? What is that additional dependent worth? What withholding adjustments can you make now because of the additional deduction? Did you know that can make any adjustment to you withholding by simply asking your employer for a new W-4. You can use the new W-4 to add or remove the number of exemptions you claim. Or you can make an adjustment by leaving the number of exemptions as is and just have a little more money added to you withholding.
Increase in Tax Brackets
Due to inflation, the tax brackets for income taxes have increased across the board
If you’re single you will owe:
• $0-$9,275 you will owe 10 of your taxable income.
• $9,275-$37,650 you will owe $927.50 + 15 of anything over $9,275.
• $37,650-$91,150 you will owe $5,183.75 + 25 of anything over $37,650.
• $91,150-$190,150 you will owe $18,558.75 + 28 of anything over $91,150
• $190,150-$413,350 you will owe $46,278.75 + 33 of anything over $190,150.
• $413,350-$415,050 you will owe 119,934.75 + 35% of anything over $413,350.
• $415,050 and higher you will owe $120,529.75 + 39.6 of anything over $415,050.
If you’re married and filing jointly, you will owe:
• $0-$18,550 you will owe 10 of your taxable income.
• $18,550-75,300 you will owe $1,885 + 15% of anything over $18,550
• $75,300-$151,900 you will owe $10,367.50 + 25 of anything over $75,300.
• $151,900-$231,450 you will owe $29,517.50 + 28 of anything over $151,900.
• $231,450-$413,350 you will owe $51,791.50 + 33 of anything over $231,450.
• $413,350-$466,950 you will owe $111,818.50 + 35 of anything over $413,350.
• $466,950 and higher you will owe $130,578.50 + 39.6 of anything over $466,950.
Increase in Standard Deduction
The standard deduction for heads of household rises from $9,250 for the 2015 tax year, to $9,300 for the 2016 tax year. The other standard deduction amounts for 2016 remain as they were for 2015: $6,300 for
singles and married persons filing separate returns and $12,600 for married couples filing jointly.
Earned Income Credit
The maximum Earned Income Credit amount for 2016 is $6269 for taxpayer filing jointly who have 3 or more qualifying children, up from a total of 6,242 for tax year 2015. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
Affordable Care Act
Millions will still have access to affordable health care in the United States, however, the penalties have increased. There is a penalty of 2% of yearly household income or $325 per person for individuals, with a maximum penalty per family for those using this method of $975.
Increase in Identity Theft
Due to last year’s tax fraud, the IRS has implemented a new policy. Taxpayers may receive a letter when the service stops suspicious tax returns that attempt to steal your identity, but use their own social security number or name. Taxpayers now also have the ability to receive copies of the fraudulent tax returns, so they can take steps to secure their identity.
As per the Supreme Court ruling in 2015, all married couples will be recognized the same way for state income tax purposes, regardless of gender. This will impact the ability to file joint income tax returns, the ability to transfer property to each other tax-free, the ability to leave an estate to the spouse without gift tax implications, and spousal treatment of inherited IRAs.
Salary Threshold for Overtime Pay
Rules proposed by the Obama administration are changing the face of overtime pay. If accepted, the Department of Labor would require most salaried workers earning less than $50,440 annually to be paid 1.5 times their normal pay for time worked beyond 40 hours. If passed, it will take effect on January 1, 2016.
New Filing Deadlines
In observance of Emancipation Day on Friday, April 15, taxpayers will have until the 18th to file their 2015 individual tax returns and make their estimated tax payments. Taxpayers in Main and Massachusetts will have until the 19th of April in observance of Patriots day on April 18th.