The Facts About The Tax

There are few things in life more boring than taxes, let’s be honest. As much as the world needs to be spared another article on the recent tax reform, we feel there are actually fewer things more important than taxes when it comes to personal financial planning. Though we do not wish it upon anyone to try to swim through the pool of nearly 500 pages of the Tax Cuts and Jobs Act, we do recommend you grab yourself a raft and some sunglasses as we shed some light on 2018 Tax Reform.

The Tax Cuts and Jobs Act directly affects every taxpayer in 2018 by, among other things:

• Cutting income tax rates across the board,

• Doubling the standard deduction for tax filers,

• Eliminating personal exemptions and most itemized deductions,

• Cutting the corporate tax rate from 35% to 21%

*It is important to note the changes to individual tax cuts are only in force until 2025 while the corporate tax cuts are permanent.

Income Tax Cuts

The Act still has seven tax brackets, which is the same as the previous tax code, but each tax bracket is now taxed at a lower rate. The following table compares the 2017 rates with the rates going into effect for 2018:

*Dollar value thresholds are subject to change each year due to inflation, indexed against chained CPI

Source: https://taxfoundation.org/2018-tax-brackets/

One significant difference between the old and new tax brackets is how they are adjusted each year for inflation. The new tax brackets will rise more slowly than in the past because the Act calls into use the chained consumer price index instead of the traditional consumer price index. Confusing economic indexes aside, this means the income ladders of the new tax brackets may not adjust as quickly over time, increasing the likelihood someone jumps up to a new tax bracket…clever move Uncle Sam. Clever move.

Doubled Standard Deduction

The standard deduction for single, married, and head of household filers is as follows:

*Dollar value thresholds are subject to change each year due to inflation, indexed against chained CPI

Source: https://taxfoundation.org/2018-tax-brackets/

In 2014, about 30% of tax filers itemized their deductions. Under the new tax law, it is estimated over 90% of taxpayers will now take the standard deduction. Although this is a good first step in simplifying the tax filing process, the forfeiture of several popular itemized deductions may sting some taxpayers where it hurts most, their wallets.

Eliminated Personal Exemptions

Personal exemptions of $4,150 were available to all tax filers for each person claimed on their taxes. As a result, families with multiple dependents may have a higher tax bill despite having a greater standard deduction under new law.

Changes to Itemized Deductions

The itemized deductions are as follows:

Eliminated

1. Moving Expenses: except for members of the armed services

2. Alimony: It used to be those paying alimony claimed the deduction while it was taxable for those receiving it. Under new law, those paying include alimony in taxable income while those receiving it claim the deduction. (begins 2019 for divorces in 2018 and later)

3. Un-reimbursed Business Expenses, Home Equity Loan Interest, and Tax Preparation Fees

Reduced

1. Mortgage Interest: For new buyers, the $1,000,000 limit drops to $750,000. This affects new mortgages while leaving all existing mortgages at the $1,000,000 level.

2. State and Local Taxes: May deduct up to $10,000 of either property OR income/sales taxes while there were no limitations previously.

Expanded

1. Medical Expenses: Taxpayers may now deduct medical expenses if they are greater than 7.5% of income while the limitation used to be 10% for those born after 1952.

Other Tax Changes

Obamacare Tax Penalties

The Tax Cuts and Jobs Act also eliminates the Obamacare Tax on those without health insurance in 2019. It used to be that if a taxpayer did not have health coverage for more than nine months out of the year, they could be penalized up to 2.5% of their adjusted gross income.

Estate Tax

The estate tax exemption has been doubled to $11.2 million for individuals and $22.4 million for couples.

Child and Elder Care Credit

The Child Tax Credit increases from $1,000 to $2,000 and the income limitation increases from $110,000 to $400,000 for married filers. Additionally, the Act allows a $500 credit for each non-child dependent which helps families who may be caring for elderly parents.

529 Savings

529 Savings plan were once only permitted for post-secondary education expenses. Under the Act, 529 savings plans are now qualified to pay tuition at private and religious K-12 schools and may even be used to fund expenses for home-schooled students.

Tax Cuts For Businesses

Tax Rates

One of the most significant changes to taxes under the Act is the reduction of the corporate tax rate from 35% to 21%.

Standard Deduction

The standard deduction for pass through entities (sole proprietorships, partnerships, LLCs, and S-Corps) is raised to 20%. The deduction phases out for individuals when their income exceeds $157,500 and for joint filers at $315,000.

Interest Deduction

Deductible interest is now limited to 30% of earnings (EBITDA until 2021, EBIT thereafter). This makes it more expensive for firms to borrow funds.

Depreciation

Businesses may now deduct the cost of depreciable assets, excluding structures, in one year instead of amortizing them over several years. This provides business owners another accounting option but combined with the 30% limitation on deducting interest we may see fewer business racing to finance new technology and equipment.

Final Words

It is difficult to say exactly where all these changes will lead us in the coming years but we can surely say this. Have a plan, monitor your risk exposures, and adjust as necessary with the help of both a trusted financial planner and tax professional. If you can do that, everything else is easy; that’s a fact!

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Securities offered through Securities America, Inc., member FINRA/SIPC, Betsy Merritt & Tyler Aubrey Representatives. Advisory services offered through Securities America Advisors, Inc. New Break Financial and Securities America are separate companies. Securities America and its representatives do not provide tax or legal advice. It is important to coordinate with your tax or legal advisor regarding your specific situation. Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.