The changes to the tax code have left most of our clients with more questions than answers. It is easy to become confused with the newest revision to the Tax Code.  It is the most extensive change in the past 30 years.  But now is the time to evaluate how these changes will affect your tax return for 2018.

Summertime hardly seems like the time to think about tax returns, but it is the perfect time to formalize a tax strategy with your tax professionals that can lessen your tax burden in light of these new changes. Why scramble in the last quarter, trying to figure out a tax plan to offset the newest tax code changes?  Why add more stress to the holiday season by worrying about how much you may owe because of a lack of a strategic plan?

But remember – even with the current changes, there will ALWAYS remain tax reduction strategies to utilize.

Some of the most pertinent changes are as follows:

For Individuals:

  • SALT – As widely reported, the deduction for the State and Local Taxes are capped at $10,000.  However, coupled with this change, there has been a major shift in the tax brackets (for example, prior to 2018, the highest bracket was 39.6%, but now it has been lowered to 37%), along with the elimination of the “Pease” limitation, which reduces the value of a taxpayer’s itemized deduction.

  So, although you can no longer claim any amount over the $10,000, you will be saving an overall percentage from the tax bracket shift and the Pease elimination, limiting itemized deductions.

  Additionally, the primary reason most people were subject to the Alternative Minimum Tax (AMT) was because of SALT deductions in the first place.

  Sure the cap on the SALT deduction may cost you more, but it is not as dramatic as you may think because of the drop in the tax bracket percentages, the Pease elimination and the possibility of no longer being subject to AMT.

 

  • Personal Exemption, and Miscellaneous Itemized Deductions are eliminated.

 

  • Medical expense deduction threshold is temporarily reduced from 10% to 7.5% of the Adjusted Gross Income (AGI) for all taxpayers for tax years 2017-2018.

 

  • Home equity interest deduction is eliminated & the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately).

 

  • Charitable contribution deduction limitation has been increased from 50% to 60%.

 

  • Casualty and theft loss deduction has been eliminated.

 

  •  Most Education tax items remain unchanged with exception of the following:

529 Plans:

– Expanded to elementary and secondary educational expenses (including private and parochial schools – up to $10,000).

– Amounts are allowed to be rolled over to an ABLE account without penalty.

  • Spousal support – For divorce agreements executed after December 31,2018, spousal support will no longer be deductible by the payor or includible as income by the payee on his/her respective income tax returns. This change also extends to agreements executed on or before 12/31/2018 AND MODIFIED AFTER THAT DATE, provided that the amendment expressly states that the new law will be applicable.

 

  • Estate and Lifetime Gift Tax Exemption increased from $5M to $10M for tax years 2017-2026.

 

  • Annual Gift Exclusion is $15,000 per donee/donor. A married coupe can gift $30,000 per couple per donee.

 

For Businesses:

  • 199A Deduction of 20% for Qualified Business Income for the 2018-2025 tax years (applies to pass-throughs by ALL businesses except “Specified Service Trade or Business”).

 

  • The exclusion does not apply to those falling into the Small Taxpayer Rule: The exclusion from being a qualified trade or business does not apply to small taxpayers (taxable income of less than $315,000 (married-filing jointly) or $157,000 (all others).

 

  • Section 179: Small Business Benefit – Business may deduct up to $1M for new and used equipment, as well as off-the-shelf software, purchased or financed in the 2018 calendar year on a dollar-for-dollar basis. An additional $2.5M cap is in place for equipment on a reduced phase-out amount. This benefit is a true “small business tax incentive” because larger businesses that spend more than $3.5M will NOT get this deduction.

 

  • Consider the pros and cons of changing the entity structure of your business to fully take advantage of these new incentives and deductions.

 

There’s certainly a lot to consider – and we, at WealthEdge®, are always available to answer your questions and offer clarifications.

So kick back, pour yourself a cold iced tea and make that call to your tax team. Evaluate how the newest tax code changes affect you and your wealth and determine ways in which you can offset those tax implications. 

Be proactive with your tax situation – NOT REACTIVE.