The New Tax Reform Package for TY 2018 and Beyond
The tax reform bill lowers the tax rates for many families and eases the impact of the alternative minimum tax. For most taxpayers, the biggest changes revolve around deductions; the standard deduction is nearly doubled. For a married couple filing jointly, for example, the standard deduction will jump from $12,700 to $24,000.
Additionally, the child tax credit is expanded significantly, doubling from $1,000 to $2,000, and the first $1,499 is refundable, meaning a taxpayer could receive a refund even when a tax liability does not exist. The bill also creates a $500 credit for other qualifying dependents besides a taxpayer’s own kids.
The bill also eliminates the penalty for not having health insurance beginning in 2019 and on the taxpayers’ 2019 return filed in 2020. This is often referred to as the individual mandate.
On the corporate side, the big news is the creation of a single tax rate of 21%, replacing the previously tiered rate structure that had a top rate of 35%. The bill also eliminates the corporate alternative minimum tax. In addition, pass-thru entities such as sole proprietorships (self-employed, contractors, freelancers and business of one), S corporations or partnerships that enable their recipients to declare their incomes on personal returns will gain a new 20% deduction on their Qualified Business Income. There are limits to this benefit, and the IRS will be providing additional guidance on how the new rules will work. Stay tuned.
Finally, the bill raises the maximum Section 179 expense that can be deducted from the current $510,000 to $1,000,000 and increases bonus depreciation from 50% to 100%, which allows small business to deduct the full purchase price of qualifying equipment and/or software purchased of financed during the tax year.
Another big change is the elimination of the personal and dependent exemption-a $4,050 per person tax break in 2017 that could especially affect larger families. A number of itemized deductions are either reduced or eliminated entirely.
In addition, the new bill limits the amount of State and local property, income, and sales tax can be deducted to $10,000. In the past, these taxes have generally been fully tax deductible-something that may affect people living in high-tax States. Also, the deductible interest from new mortgages is limited to home mortgages up to $750,000- down from $1,000,000 under current law. There will be no change for homeowners with existing mortgages that were taken out to buy a home.
For businesses, the bill limits the business interest deduction to 30% of income (excluding depreciation), however, small businesses with gross receipts averaging under $25 million for the prior three years are exempt from the business interest limit.