Yesterday Congress passed their new income tax law. It will be soon be signed by the President and become law. It is the most major overhaul in the income tax law in over 30 years. There are significant changes that affect every taxpayer. Following are a few highlights of the new law:
- The standard deductions are roughly doubled. The new standard deductions are $12,000 for single, $18,000 for head of household, and $24,000 for married filing jointly. Now about 30 percent of the federal returns itemize deductions. With the increase in the standard deduction only about 10 percent of returns will itemize deductions. (Taxpayers in some states will still be able to itemize on their state returns).
- The exemptions for the taxpayer, spouse, and dependents are repealed.
- The deduction for state and local taxes is capped at $10,000.
- The mortgage interest deduction is limited to $750,000 of acquisition debt on a primary and secondary home. Interest on up to $1,000,000 of acquisition debt on loans prior to December 15, 2017 is grandfathered in. The deduction for home equity debt is repealed.
- The itemized deductions that are subject to the 2% of adjusted gross income threshold are suspended.
- The phase-out of itemized deductions for higher income taxpayers is suspended.
- The moving deduction is suspended expect for a military change of station. Employer reimbursement for moving expenses would be taxable wages.
- For divorce agreements entered into or modified after December 31, 2018, alimony would no longer be deductible by the payer and would not be income to the recipient.
- There are still seven tax brackets but they are at different rates and thresholds. The new rates are: 10, 12, 22, 24, 32, 35 and 37%.
- The child tax credit is doubled to $2,000 for each qualifying child under 17. The credits phase out at higher thresholds than before.
- The individual mandate of the Affordable Care Act is repealed, effective in 2019.
- The estate and gift tax exclusions are doubled.
- The corporate tax rate is reduced to a flat 21%.
- The Section 179 small business expensing limitation is increased to $1,000,000.
What can I do before the end of 2017?
- Give to charity
Year-end charitable contributions have always been a way to reduce tax liability. This year that strategy may be even more useful than before. Because of the large increase in the standard deduction in 2018 and following years, fewer taxpayers will reach the threshold where they will itemize. Therefore, if they would not get any benefit from a 2018 contribution, it would make sense for taxpayers to accelerate contributions into 2017. Charitable contributions for college athletic event seating rights are disallowed after 2017, so those contributions should be made before the end of this year in order to be deductible.
- Accelerate other deductions
You may be able to prepay your 2018 property taxes if your municipality allows it. This would not be advisable if your property taxes are paid through escrow. The law does not allow you to prepay 2018 state income taxes, but you can pay larger 2017 estimate payments and the benefit of a deduction in 2017, and if you have a state refund for 2018 that income would likely be taxed at a lower rate. The expenses that are subject to 2% of adjusted gross income are disallowed after 2017. These include unreimbursed employee expenses, investment expenses, and tax preparation expenses. You may consider prepaying these expenses in 2017 because the deductions will not be available in the future.
- Defer income
The opposite of accelerating deductions is deferring income. This is another common technique to reduce tax, that may be even more beneficial than usual this year. If the taxpayer believes that their tax rates will fall as a result of the tax law, deferring income would save them money because of the lower rates and more beneficial tax brackets. It may be possible for businesses to delay billing their clients and customers until the beginning of 2018.
These highlights barely scratch the surface of all the changes in the new tax law. The law is complex. I will make other posts about the tax law in the coming days as we analyze its ramifications. Before you make any decisions, you need to consult your tax professional to see how these changes affect you and your tax situation specifically. Please contact me at email@example.com or 205-313-6490. I wish you a Merry Christmas and a Happy New Year!