Impact on the Recently Enacted Tax Plan

Unlike many tax law changes from year to year, this year’s new tax law has multitude of significant changes.  Some of the changes are intertwined – and some of the changes are offset by other changes such as:

• There is a tax rate reduction, offset by an elimination or reduction of certain tax deductions.
• There is an increased standard deduction, offset by the loss of the personal exemption.
• There is a reduction of Alternative Minimum Tax, offset by a limit on the deduction for State and local income taxes and property taxes.

While the new tax law will benefit most taxpayers, it is important to keep in mind that every tax situation is unique and the final result is affected by family size, income level, type of income, total amount of income, the type of deductions, and total deductions.  The results can also vary year to year.  There are planning opportunities for all, particularly for those who are self-employed or have a side business.

What follows is an overview of some of the significant changes:

Personal Tax Returns:

• There is a tax rate reduction of 3% (rough average).
• The $4,050 personal exemption (per family member) is eliminated.
• The child tax credit is doubled to $2,000 and is now available to those with higher incomes.
• There is a temporary $500 tax credit for each child, disabled child, and ailing elderly parent, who do not otherwise qualify as dependents.
• The Alternative Minimum Tax has been reduced (by raising the income level at which it kicks in).
• Many taxpayers reduce their tax bill by taking a “standard deduction”.  Others take “itemized deductions” for certain expenditures: home mortgage interest, State and local income taxes, home and vacation home property taxes, medical expenses, and charitable contributions.
  • For those that take a standard deduction (such as young adults who are renting or living at home and do not have many itemized deduction expenses) there is an increase in the standard deduction, it has been almost doubled to $24,000 for married couples and $12,000 for single individuals.
  • For those that do have itemized deduction expenses, some deductions have been reduced.  These include:
    • A $10,000 cap on total combined state and local income taxes and property taxes. (This does not affect the property tax deduction for rental property)
    • For new mortgages taken out after November 2017, mortgage interest can only be deducted on mortgage debt of  up to $750,000.
    • Mortgage interest on existing and new Home Equity loans will no longer be deductible.
  • For those that do have itemized deduction expenses, some deductions have been increased.  These include:
    • Medical expenses (including long term premiums and qualified home aides) exceeding 7.5 % of income (before it was 10%).
    • There will be no phase out of itemized deductions at higher income levels
• For divorce agreements executed after December 31, 2018, alimony will not be deductible for the payor and will not be included in income of the recipient.
• There are no changes to capital gains.

Small Business:

• The tax rate on small business profits will be lowered by a 20% deduction for such profits. This deduction is phased out for those in service businesses beginning at $315,000 of income for married taxpayers ($154,000 for single taxpayers).  It does not apply to salary drawn by a business owner.  (You must therefore plan, plan, plan.)
• After the deduction, a lower tax rate is then applied to this income (previously this income was combined with other income and taxed at higher regular income tax rates).

Estate Tax:

• The exemption, that part a person’s estate that is not subject to tax, is doubled from $5.6 million to $11.2 million per person. Effectively and properly planned there is a $22.4 million exemption for married couples.

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