Blog

Your #1 resource for authoritative advice on tax reform and tax planning for 2018.

Tax Reform Changes Everything

There are very few pivotal moments in U.S. tax history. From the Tea Act, which led to U.S. independence to the Tax Reform Act of 1986, most changes since then have been small.

That is until now. On December 22, 2017, Congress passed and the President signed H.R. 1, more commonly referred to as the Tax Cuts and Jobs Act (“TCJA”), or, for our purposes: Tax Reform.

The TCJA has completely changed many aspects of existing tax law. Below we cover the major changes for individuals including changes to rates, tax brackets, and the itemized deduction. The below section contains 14 facts you need to know to beat Tax Reform in 2018.

The Tax Cuts and Jobs Act

Individual Taxes: Filing Status, Tax Rates, Brackets, and Standard Deduction Changes under Tax Reform

 

1. Filing Status – There are no significant changes to filing status. However, preparer due diligence will now apply to head of household status, for non-married filers with dependents.

 

2. Ordinary Rates – There are seven ordinary rates: the lowest starting 10 percent, with the next at 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and the highest at 37 percent.

 

3. Long-Term Capital Gain Rates: These did not change and remained at the 0%, 15%, and 20% rates.

 

4. Married Filing Jointly Standard Deduction: All standard deductions are doubled; for Married Filing Jointly filers, the standard deduction is set to $24,000.

 

5. Head of Household Standard Deduction: For single parents or other single filers who can claim dependents and file as Head of Household, the Standard Deduction is $18,000.

 

6. Single or Married Filing Separately: The standard deduction for single filers (not married and no dependents) increased to $12,000.

 

7. Personal Exemptions: Under tax reform, personal and dependent exemptions are eliminated. These were previously $4,050 per exemption in 2016, which reduced adjusted gross income per member of your household that you could claim as a dependent, including yourself.

 

8. Married Filing Jointly Tax Bracket: 10% on first $19,050, 12% on income earned between $19,050 to $77,400; $22% on income above $77,400 to $165,000; 24% on income between $165,000 and $315,000; 32% on income above $315,000 and below $400,000. Marginal rates of $35% apply to the next bracket up to $600,000 and the rate of 37% applies to income above $600,000.

Different tax rates are applied at different levels of income. So if you’re Married and filing your tax return jointly with your spouse and have taxable income of $25,000, your first $19,050 is taxed at 10% resulting in $1,905 in tax and the next $5,950 ($25,000 – $19,050), is taxed at 12%, which is another $714 in taxes ($5,950 x 12%). The total resulting tax is $2,619 ($1,905 + $714).

 

9. Single or Married Filing Separate Tax Bracket: 10% on first $9,525, 12% on income earned between $9,525 to $38,700; $22% on income above $38,700 to $82,500; 24% on income between $82,500 and $157,500; 32% on income above $157,500 and below $200,000. Marginal rates of $35% apply to the next bracket up to $300,000 and the rate of 37% applies to income above $300,000.

In a Single example, with taxable income of $25,000, your first $9,525 is taxed at 10% resulting in $953 in tax and the next $15,475 ($25,000 – $9,525), is taxed at 12%, which is another $1,857 in taxes ($15,745 x 12%). The total resulting tax is $2,810 ($953 + $1,857).

 

10. Head of Household Tax Bracket: 10% on first $13,600, 12% on income earned between $13,600 to $51,800; $22% on income above $51,800 to $82,500; 24% on income between $82,500 and $157,500; 32% on income above $157,500 and below $200,000. Marginal rates of $35% apply to the next bracket up to $500,000 and the rate of 37% applies to income above $500,000.

 

11. Alimony Received: Will not be taxable to the payee spouse and will no longer be deductible by the payor spouse, effective 2019.

Word to the Wise: If you pay alimony, there is a tax benefit to front-loading payments before 2019. If you receive alimony, it won’t be taxable as income until 2019 so there is some tax benefit to delaying payments until then.

 

12. IRA and HSA Deductions: Are preserved under the new law. Taxes on retirement distributions and social security benefits have not changed.

 

13. Alternative Minimum Tax Modifications: Increases the AMT exemption to $70,300 or $109,400 for joint filers.

 

14. Itemized Deductions: A maximum deduction of $10,00 is allowed for any combination of state and local income taxes or local property taxes, making it harder to “beat” the standard deduction allowance. Mortgage interest deduction remains deductible up to $750,000 of mortgage debt incurred December 15, 2017 or later (the pre-TCJA limitation of $1 million applies to earlier debt).

Given the changes to the standard deduction and limitations on local and state income taxes, we expect many more filers will move to the larger standard deductions. To calculate whether the standard deduction is better, you’ll need to add charitable contribution to state / local income taxes to mortgage interest. If this is more than the standard deduction, you should itemize. Otherwise, you should take the standard deduction.

 

 

Or, looking to book a consultation? Book us here.

Book your session now!

Still looking to save $1,000's on taxes?

Join our mailing list to receive the latest pro tips on tax and accounting. 

You have Successfully Subscribed!