Financial Pathways: Tax reforms to keep in mind going forward (column)
April 17, 2018
In my Jan. 31 Financial Pathways column I introduced some of the key details of the Tax Cuts and Jobs Act that Congress approved in December. Today, I will highlight seven more areas of the tax reform legislation. First, though, let's do a very brief summary of Part One. Standard deductions starting in 2018 are $12,000 for singles and $24,000 for married filing jointly, but personal exemptions are being eliminated. Simplification is the key.
I also covered the increase of the child tax credit, the expansion of the 529 college savings plan, capital gains, the medical expenses deduction retroactive to 2017 and changes to charitable contribution deductions.
If you did not read the Jan. 31 column you cann access it at SummitDaily.com, or email me and I will forward it to you.
Key Areas of Tax Reform
Mortgage Deductions: In 2018, you will still be able to deduct the interest on existing mortgages up to $1,000,000 and the interest on new mortgages up to $750,000.
Home Equity Debt: Starting in 2018 you will no longer be able to deduct any interest on home equity loans.
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State and Local Tax (SALT) Deductions: Previously, individuals that itemized could deduct all state and local property and real estate taxes.
For 2018, these deductions will be capped at $10,000. This was one of the most controversial aspects of the tax reform, particularly for high tax states like New York, California and New Jersey.
Colorado has a flat marginal tax rate of 4.63 percent, regardless of income, for its state income tax. Depending on your income, the state income tax and property taxes could exceed the cap.
Alternative Minimum Tax (AMT):
In 2017, the AMT exemption for singles was $54,300 with a phaseout beginning at $120,700, and the married filing jointly exemption was $84,500 with a phaseout beginning at $160,900. Beginning in 2018, the AMT exemption for singles increases to $70,300 with a phaseout at $500,000; the AMT exemption for married filing jointly increases to $109,400 and phases out at $1,000,000.
Charitable Deductions: This was covered in part one. The overarching theme, though, was that charitable deductions for most individuals will be covered under the standard deduction of $12,000 single or $24,000 for married filing jointly and itemization will not be necessary.
To exceed the standard deduction and have a need to itemize to get more of a deduction would entail substantial donations for the year. My recommendation to get credit for charitable donations is to have "skip" years.
By that I mean to double up your giving every other year to include donations from the skip or off year. You would itemize on "double up" years and use the standard deduction on the skip years.
This would, of course, be predicated upon having substantial donations along with other deductions that total significantly more than the standard deduction.
Pass-through Business Taxes: Businesses organized as a sole proprietorship, LLC or partnership do not pay corporate taxes but instead the owners pay individual income taxes on their business income, called pass-through business taxes.
Starting in 2018, business owners can take a 20 percent deduction on their pass-through business income, with limitations where income is over $157,500 for single taxpayer and $315,000 for married filing jointly.
Corporate Tax: As you no doubt heard in the news, there was quite a battle during the tax reform discussions as to what the new corporate tax rate should be. Previously the top rate was 35 percent, one of the highest in the world.
There was also a corporate alternate minimum tax. Starting in 2018, the corporate tax rate is 21 percent and the AMT is eliminated. Unlike most of the other new tax laws that expire at the end of 2025, this one is permanent.
Nancy Gardner is not a CPA; she is a Certified Financial Planner. She and her husband Bill and dog Daisy split their time between Summit County and Montgomery County, Texas. For questions, email Nancy at firstname.lastname@example.org.
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