Death and taxes: both are inevitable, neither is predictable. 

President Donald Trump’s Tax Cuts and Jobs Act, approved in 2017, is now taking effect and it has are some major changes. The idea behind the act was to take less out of worker’s paychecks, giving them more money in the short term that would hopefully boost the economy. Some economists warn the changes will expand the nation’s debt, while others say it will be offset by overall growth of the economy.

While it’s hard to say if it’s positive or negative just yet, every person’s situation is different. And there are many parts of the TCJA that feature complicated timetables. For example, a deduction that’s available only during a one-month window, or a provision that doesn’t start until 2019, or expires in 2025. 

Here’s a breakdown of some of the changes:

• INDIVIDUAL INCOME TAXES

The benefit for everyone was reduced individual income tax rates; every bracket fell a percentage point or two. According to the U.S. census, the 2017 median household income was about $63,000. Assuming it was a husband and wife filing jointly, they would have paid a rate of 15 percent in 2017, but enjoy a rate of 12 percent in 2018. The highest tax rate of 37 percent applies to a couple with a taxable income of more than $600,000. Last year, they paid a rate of 39.6 percent.

• STANDARD DEDUCTION

One of the biggest changes eliminated certain itemized deductions for a doubled standard deduction: single individuals $6,350 to $12,000 and married filing jointly from $12,700 to $24,000 for 2018 taxes. Because the deduction has almost doubled, it no longer behooves some to fill out the complicated forms for deductions and just go for the flat rate. 

• OTHER DEDUCTIONS

The new tax code eliminates personal exemption —the box you used to check to save $4,150 for each member of your family. That hurts large families. On the plus side, the child tax credit was increased from $1,000 per mini-me to $2,000 per mini-me up to the age of 17.

Old deductions such as moving expenses, except for military personnel, are gone. Effective Jan. 1, 2019 those paying alimony can no longer deduct it for agreements executed after Dec. 31, 2018, while those receiving it do not report it as income. (There’s other provisions in there, too, but none that would make ex’s feel any more charitable about one another.) And filers can’t write off that tax preparer bill either, or investment expenses, or employer-reimbursed business expenses like parking costs. The good news is retirement savings and student loan interest deductions are still there. And that part of the code called “Pease Limitations” has been repealed. That means those who make donations can claim the tax deduction in full, as it is no longer tied to income levels — but only if they itemize.

The medical expenses deduction has been reduced to 7.5 percent down from 10 percent for adjusted gross income for regular tax, which is a win for people with high medical costs. Taxpayers without insurance will still have to pay a fine this year (but not next year) — $695 or 2.5 percent of the household income, whichever is higher.

Mortgage deductions have also changed, and only homeowners with an acquisition debt (mortgage) of $1 million or more are impacted negatively. Mortgage interest deductions on homes valued at $750,000 or less still qualify so long as they were purchased between December 2017 and closed by January 2018. Again, because of the rise in standard deductions, many homeowners may no longer itemize this one. 

• ESTATE TAXES

For taxpayers who happen to inherit a lot of money in the past year, the larger estate tax exemption will help. The tax only applies to the portion of the inheritance which exceeds a certain amount. In 2018, that’s up from about $5 million to $11.2 million for singles or $22.4 million for couples, but the 40 percent tax rate still applies. According to the Tax Policy Center, only 1,700 estates would owe federal taxes this year. 

• CORPORATE TAXES

Trump’s Tax Cuts and Jobs Act reduces corporate taxes to the lowest rate since 1939— from 35 percent to 21 percent. But, and there’s always a but, the effective rate for American businesses is actually 18 percent because of credits, rebates and loopholes. (For example, according to national media, Amazon will pay no federal taxes — $0 — for the second year in a row, despite profits of $11 billion in 2018). 

Business taxes are figured differently if the business qualifies as a “pass through” entity. This mostly affects partnerships, S-corporations, and LLCs— which make up a huge percentage of Keys businesses. A pass-through business pays no tax itself, but the business owners (based on their share of ownership) pay the business tax based on their individual income tax bracket. For these folks, they qualify for a new below-the-line deduction 20 percent tax rate of qualified business income (QBI), or the taxpayer’s taxable income reduced by net capital gains — whichever is lower. Sole proprietors and rentals that qualify as a business or trade can benefit from the QBI as well.

• LOSS CLAIM DEDUCTION

Beginning in 2018, taxpayers can only claim a deduction in this category if he or she suffered a loss from a federally declared disaster. These losses can be taken in the year incurred or the year prior. That means it’s okay in the event of a big hurricane, but other losses such as fire and theft are only deductible if they don’t exceed personal casualty gains.

• SALT

SALT stands for State and Local Tax deduction, and applies more to states with high income tax rates like California and New York, but not Florida as it has no income tax. In previous year, taxpayers were allowed to make deductions based on property tax, sales tax and income tax. Now, taxpayers can’t file deductions based on sales plus income tax it has already paid, and it’s limited to $10,000. While some say this will hurt those living in high income tax states, other say it will properly distribute the tax burden geographically.

 

For Tax Year 2018, taxpayers will no longer use Form 1040-A or Form 1040-EZ, but instead will use the redesigned Form 1040. Many people will only need to file Form 1040 and no schedules. However, if the return is more complicated (for example you claim certain deductions or credits, or owe additional taxes) taxpayers will need to complete one or more of the new Form 1040 Schedules. Individuals who filed their federal tax return electronically last year may not notice any changes, as the tax return preparation software automatically fills the form and any needed schedules. — irs.gov  

 

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