****THE FOLLOWING IS EXTREMELY IMPORTANT INFORMATION
As most are aware, tax reform has passed in Congress. These changes will not affect the upcoming tax filing but will affect your 2018 year and it's filing at the beginning of 2019. Some of you will see benefits from these changes but many of you will not. I will attempt to outline these changes and provide concrete examples to help you better understand them.
The current 7-tier tax bracket will be reduced to four tax brackets. They are as follows:
10% - Income $0 to $9,525
12% - Income $9,526 to $38,700
22% - Income $38,701 to $82,500
24% - Income $82,501 to $157,500
32% - Income $157,501 to $200,000
35% - Income $200,001 to $500,000
37% - Income $500,001 and up
10% - Income $0 to $19,050
12% - Income $19,051 to $77,400
22% - Income $77,401 to $165,000
24% - Income $165,001 to $315,000
32% - Income $315,001 to $400,000
35% - Income $400,001 to $600,000
37% - Income $600,001 and up
This next section is particularly important to your deductions as taxpayers.
The standard deduction is for those that don’t have deductions that add up to or more than the standard deduction that the government gives you. The current 2017 standard deduction is $6,350 for a single filer, $9,350 for head of household and $12,700 for a married filer. Under the 2018 plan they would nearly double the standard deduction so that single filers can deduct $12,000, $18,000 for head of household and married filers can deduct $24,000. This sounds appealing on paper but there are hidden factors here. Under our current system each taxpayer AND EACH OF THEIR CHILD DEPENDENTS get an additional $4,050 deduction called personal exemptions. This deduction has been eliminated. For example in the current system a married couple with 3 children would get a standard + personal exemption deduction of $32,950 ($12,700 for married filers + $8,100 for their personal exemption + $12,150 for their three children). But in the proposed House tax plan that same family would get a total of $24,000 in the deduction.
The credit would increase to up to $2,000 per child, and the first $1,400 would be refundable, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit would increase from $110,000 to $400,000 for married couples filing jointly. The expanded credit ends after 2025.
This is the area that has the most dramatic changes. The new law will raise the standard deduction and therefore eliminate most of the itemized deductions. Itemized deductions are things like medical expenses, state and local taxes, mortgage interest, property and personal property taxes, charitable contributions, tax preparer expense & unreimbursed employee job expenses. If these deductions add up to more than your allotted standard deductions then you are allowed to use those to your benefit instead of the standard deduction.
The following aforementioned deductions remain:
The following are the deductions which the new law would eliminate:
I haven’t addressed the changes proposed to businesses. The most impacting is lowering the existing corporate tax rate from 35% to 21% in the hopes that the increased corporate profits will create more jobs and higher wages. Also pass through entities (LLCs and S Corps) will get a 20% deduction from corporate profits before the pass through to the personal returns.