Updated: Nov 16, 2018
By John Michael Kledis, EA, CFE, CVA, Peridot Consulting, Inc.
The New Tax Law – A summary (and what to expect)
Formerly, the Tax Cut and Jobs Act (TCJA), the new tax law, was passed by congress in December of 2017 making sweeping changes to the tax paradigm with the intent of simplifying taxes. If this was accomplished, or not, is yet to be determined.
1040 is a postcard
One of the more immediate changes you will notice on your 2018 tax return is the size of the 1040.
Evidently, congress deemed that simplification of the tax code to be communicated through the phrase ‘it can fit on a post card.’ This is true, the new form 1040 is small and will fit (front and back) on a half sheet of your standard 8.5 x 11 sheet of paper. Aside from that there are now a lot more schedules and additional forms. I guess mission accomplished?
TERMS TO KNOW
Prior to getting into the details, it will be beneficial to briefly define some terms, as they will be referenced throughout, as well as some base descriptions as to how things work. As with the details, terminology, and understanding thereof, matters.
Deduction vs. Credit
Deduction - is a reduction from income that reduces the amount of which a tax rate will be applied.
Credit – reduces the amount of tax directly after applied to taxable income. Credit is generally better than a deduction because it is dollar for dollar (deduction just reduces the base at which tax is applied)
Non-Refundable Credit – does not give you money back if the credit is in excess of the tax owed, and will only bring tax down to zero at max. Example, you owe $1,000 tax and have a $1,200 credit. You will not get $200 – but it will bring your tax down to $-0-
Refundable Credit – you get money back. In above scenario, you will get $200. Examples of refundable credits are Earned Income Credit and Child Tax Credit.
Graduated Income Tax – How taxes work? - I see this confusion a lot, that an individual does not want to make too much money at the fear of being in a larger tax bracket. That should not matter. As taxes are applied incrementally at the appropriate rate. You do not get taxed on your whole income at the rate of which is the highest bracket you touch, rather at the rates leading up to that bracket.
Itemized Taxes Vs. Standard Deduction – Every taxpayer gets the standard deduction. Itemized deductions (medical, charity, taxes, etc.), on the other hand, all need to be added up. If the total allowable itemized deductions are more than the standard deduction, then you can take the itemized deduction. If less, you take the standard. This is why some people itemize and some do not.
With those brief descriptions aside, lets get into some details of the TCJA. Please note the items below are but a fraction of the totality TCJA, and are only some of the major items within the law I decided as being important for the purpose of this blog.
The new individual tax rates are lower, and the spread between the thresholds is larger. At the end of this blog is the new tables for your reference.
The standard deduction was greatly increased. This is important because if you itemized in the past, now with this increase, you may not need to anymore. This created ‘panic’ to many charitable organizations because taxpayers may not ‘have to’ donate to charity anymore to increase their itemized deductions – because the standard deduction is so much larger.
By filing Status vs. 2017 – new Standard Deduction
Single - $12,000 (2017 was $6,350)
Married Filing Joint - $24,000 (2017 was $12,700)
Married Filing Separate - $12,000 (2017 was $6,350)
Head of Household - $18,000 (2017 was $9,350)
Surviving Spouse - $24,000 (2017 was $12,700)
Personal exemption is eliminated (when you filled out your W4 and did not know if you should put 0,1,2, etc.) – this was your personal exemption. An ‘automatic’ deduction. It is now gone, it was $4,050.
You can notice that a single person in 2017 had a $4,050 exemption and a $6,350 standard deduction. ($10,400 total)
In 2018 – it is now just a $12,000 standard deduction, no exemption.
What is the affect of this?
If the individual above did not itemize great, better deduction in 2018. If they had itemized deductions of $10,000 – they will lose that now because the standard deduction is larger, and they now have a less overall deduction.
If there is a family of 3 or more, it is a less deduction. (each individual gets the exemption). However, see below about the child tax credit.
Child tax credit was $1,000 – it is now $2,000. This is to help families.
The 2% Miscellaneous Itemized Deduction is eliminated. This could be major for certain taxpayers. Examples of the eliminated items:
Un-reimbursed employee expenses
Safe deposit box
Tax Prep Fees (if not taken elsewhere)
Itemized deductions that are to remain:
Mortgage interest is limited on principal of $750,000 down from $1 Million.
Home equity interest deduction is no longer allowed– unless it is qualified acquisition debt.
No more mortgage insurance premium deduction
State and local taxes paid – limited to $10,000 – major issue in high tax states, or high taxed individuals.
Medical expenses – for 2018 you can itemize any medical expenses that exceed 7.5% of your adjusted gross income. After 2018 this increases to 10%.
Selected provisions that are now gone:
Deduction for higher education expenses
Credit for qualified energy–efficient home improvements
Moving expenses (except for active military)
Penalty for not having health care in 2018 is $2,085 max. Tax act increased the exemptions from the penalty for not having health care Check these out, chances are if you did not have health care there is an exemption you qualify for to get out of this penalty. 2019 and after this penalty is $-0-. Per the law congress could not eliminate the penalty, so they just made the penalty zero.
C-corporations – new flat tax rate of 21% - was graduated from 15%-35% in prior years.
Good for big Corporations who had a higher effective tax rate of 21%, bad for small corporations who had a lower effective tax rate of 21%.
Good for personal Service Corporations – tax rate was 35% in prior years.
A personal service corporation is attorneys, accountants, doctors, etc.
Section 199A – This was a major provision included so that pass through entities (anything but a C-corporation) would not be ‘left in the dark’ due to the lowering of the C-corporation tax rates. What congress did to even the playing field was to provide a 20% Qualified Business Income Deduction to the entity that pays the tax. (Individual, estate, Trust).
There is a lot to this, please see the table below for how this works. (provided by Don Farmer Seminars).
Estate and gift tax unified exclusion amounts increased to $11,180,000. (was 5,600,000). This basically is saying, if an individual gives gifts and/or dies there is no tax on their estate (all their money/houses/cars/other assets/etc.) unless it (plus your cumulative gifts) are more than $11,180,000. Often times referred to as the ‘Death Tax.’
Here are the 2018 Individual tax rates and brackets organized by filing status:
(Table provided and attributed to Don Farmer Seminars.)
John Michael Kledis EA, CFE, CVA is Principal and founder of Peridot Consulting, Inc.
Disclaimer: This is a brief synopsis and individual situations may vary. The above has left out many details for summation purposes. Do not take any advice from this column and please consult with relevant parties before making any decisions regarding the subject matter within. Any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog. If this blog does not give you chills down your spine and an utter excitement about taxes, then the author may have failed in his mission.