Saturday, November 25, 2017

The Trump Tax Plan and You

The Short Cheap Tax Book for the Trump/GOP Tax Law is available now on Kindle.  Just $1.49.  If you don't have a Kindle, you can use a free cloud reader or phone app from Amazon.  Tons of great information and details on the new law.  All the major changes that are likely to impact most people are covered.

Here is a summary of the tax changes in the final bill that is expected to pass.  Unless otherwise noted, they apply to 2018 taxes:

Tax tables are generally better, and the tax brackets went from 10, 15, 25, 28, 33, 35, and 39.6 percent to 10, 12, 22, 24, 32, 35, and 37 percent.

Standard deductions were changed to $12,000 for Single and MFS, $18,000 for Head of Household (HH) and $24,000 for Married Filing Jointly (MFJ) and Qualifying Widower (QW).  This sounds awesome, but they eliminated the personal exemption of $4050 for everyone on the return.  For kids, this was offset by doubling the Child Tax Credit (discussed below).  Effectively, your standard deduction plus exemptions for Single/MFS went from about $10,500 to $12,000.  For MFJ it went from about $21,000 to $24,000 and for HH it went from about $13,500 to $18,000.

Claiming Head of Household has been subjected to preparer due diligence rules, so be prepared for more scrutiny from your tax guy and the IRS (starting in 2019 with 2018 tax returns - this year you are okay).

The Child Tax Credit went from $1000 to $2000, with up to $1400 refundable (able to reduce your taxes below zero.)  Other dependents get $500 (dependents who are not qualifying children age 16 and below).  The income numbers where the credit phased out were dramatically increased to $200,000 for Single and $400,000 for MFJ (up from $110,000 for MFJ).  If you are in the 25% tax bracket, you almost break even with these changes and the elimination of the exemption.  In the lower brackets, you come out well ahead.

You can deduct no more than $10,000 of state and local income and property taxes on your tax return.  You cannot prepay 2018 INCOME taxes in order to deduct them in 2017 before this change happens (You can prepay property taxes if assessed).

NEW home loans in 2018 and later can deduct interest on up to $750,000 of loans (down from 1,000,000).  Home equity debt interest is no longer deductible (new loans only).

ALL miscellaneous itemized deductions subject to the 2% of income limitation are eliminated: tax prep fees, employee business expense, investment expense and a TON more.

Casualty and theft losses are only deductible for President declared disasters.  There is also a special provision for losses due to disasters that occured in 2016.

You can deduct up to 60% of your income in "normal" charitable contributions.  Up from 50%.  (Some contributions have more restrictive limits such as stock that's worth more than when you bought it).

For 2017 and 2018 ONLY, you can deduct medical expenses that exceed 7.5% of your Adjusted Gross Income (Obamacare was phasing in a 10% threshold which will apply to everyone in 2019 and later years).

The high-income phaseout of itemized deductions was repealed.

There's a chance they won't change the withholding tables for 2018, so all these changes may show up on your tax return and not on your paycheck.  Most people will get bigger refunds, so this isn't a disaster.  UPDATE: The IRS will not be changing the W-4 form where you tell them your marital status and number of exemptions (at least not in 2018), but they do expect to have withholding tables updated by the end of January.

The Kiddie Tax was simplified dramatically (when your child has more than $2000 ish of investment income).  Children subject to the Kiddie Tax pay taxes at the rate of Estates and Trusts (higher than they normally would).

You can use up to $10,000 of 529 college savings plan money, per child, per year, on elementary and secondary tuition and other expenses without paying tax on it.

Moving expenses are no longer deductible and employer reimbursement for moving expenses is taxable except for military PCS moves.

Starting in 2019, any NEW divorce agreements will have alimony non-taxable to the recipient and non-deductible by the payer.

The estate tax exemption was raised from 5 million to 10 million.

Starting in 2019, there is no penalty for not having health insurance.

The Alternative Minimum Tax exemption and income at which it phases out were significantly increased and indexed for inflation.

Student loans cancelled due to death or total and permanent disability are no longer included as income.

They made some changes affecting the ability to undo conversions between Roth and traditional IRA during year due to value changes - too wonky to go into here.

*The following things that were talked about or included in either the House or Senate bill did not end up changing in the final bill:

Capital Gains rates are unchanged.

No change to education credits, student loan interest deductibility, plug-in vehicle credits.

Savings bond interest used for education is still not taxable.

Education provided by colleges to their employees is still tax-free in the same way as it was before.

The exclusion of employer-provided education assistance is unchanged.

Educators can still deduct $250 of in-class supplies they provide in the same manner as before, but anything above this amount that used to be deductible was eliminated with the elimination of the 2% floor itemized deductions.

No change to the exclusion of gain from the sale of personal residence (to be clear - you DO NOT have to buy a new home within 2 years to exclude it, that law was changed 20 years ago).

No change to MSA deductions or employer-provided Dependent Care Benefits rules.

No change to adoption credit or exclusion of employer-provided assistance.

No change to the solar credit (it still starts phasing out in 2020.

**Need to research more:

There's a 20% deduction for income from pass-through entities like partnerships or LLC's - Buy my Book

There are some weird changes to deducting business losses off of your ordinary income

The deduction for entertainment expenses might have been eliminated

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