Tax Reform Changes: Deduction

Major changes to the US tax code for both individuals and businesses have passed. Here is a quick summary of the tax eliminations or reductions in deductions.

Increase in standard deduction:

The new tax law nearly doubles the standard deduction amount. More on the standard deduction in a separate post.

Child Tax Credit:

For families with children the Child Tax Credit is doubled from $1,000 per child to $2,000. In addition, the amount that is refundable grows from $1,100 to $1,400. The bill also adds a new, non-refundable credit of $500 for dependents other than children.

Personal and dependent exemptions:

The bill eliminates the personal and dependent exemptions which are currently $4,050 for 2017.

State and local taxes:

The bill limits the amount of state and local property, income, and sales taxes that can be deducted to $10,000. In the past, these taxes have generally been fully tax deductible.

Home mortgages:

The bill caps the amount of mortgage indebtedness on new home purchases on which interest can be deducted at $750,000 down from $1,000,000 in current law.

Health care:

The bill eliminates the tax penalty for not having health insurance after December 31, 2018. It also temporarily lowers the floor above which out-of-pocket medical expenses can be deducted from the current law floor of 10% to 7.5% for 2017 and 2018.

So for 2017 and 2018, you can deduct medical expenses that are more than 7.5% of your adjusted gross income as opposed to the higher 10%.

Self-employed and small businesses:

The bill has a a lot of changes for businesses. I will probably break this down in separate post but here are some of the major highlights.The biggest changes includes:

  • a reduction in the top corporate rate to 21%;
  • a new 20% deduction for incomes from certain type of “pass-through” entities. For more information Click Here
  • limits on expensing of interest from borrowing;
  • almost doubling of the amount small businesses can expense from the 2017 Section 179 amount of $510,000 to $1,000,000; and
  • eliminates the corporate alternative minimum tax (AMT).

Tax Reform Changes: Some Relief

The tax reform provides some tax relief for individuals and families, by…

Increasing standard deduction:

The new tax law nearly doubles the standard deduction amount. Single taxpayers will see their standard deductions jump from $6,350 for 2017 taxes to $12,000 for 2018 taxes (the ones you file in 2019).

Married couples filing jointly will see an increase from $12,700 to $24,000. These increases mean that fewer people will have to itemize. Today, roughly 30% of taxpayers itemize. Under the new law, this percentage is expected to decrease.

Yes the standard deduction is doubling however, with the elimination of the tax exemption it’s not as favorable as it first appears.

Child Tax Credit:

For families with children the Child Tax Credit is doubled from $1,000 per child to $2,000. In addition, the amount that is refundable grows from $1,100 to $1,400. The bill also adds a new, non-refundable credit of $500 for dependents other than children. Finally, it raises the income threshold at which these benefits phase out from $110,000 for a married couple to $400,000.

Tax Reform Changes: Pass-Through Deduction

Tax Reform! Major changes to the US tax code for individuals and businesses.

I will be posting a series based on my research on the changes you should know about for both businesses and individuals.

Reform Changes For Businesses

The pass-through deduction

Does it apply to you?

The new tax code makes a big change to the way pass-through business income is taxed. This includes income earned by sole proprietorships, LLCs, partnerships, and S corporations.

Under the new law, taxpayers with pass-through businesses like the ones mentioned above will be able to deduct 20% of their pass-through income. In other words, if you own a small business and it generates $50,000 in profits in 2018 (Net Income), you’ll be able to deduct $10,000 of it before the ordinary income tax rates are applied.

HOWEVER…

If you are above the threshold amount, you are subject to limitations and exceptions which are determined by your occupation and a wage (and capital) limit.

The threshold amount is the amount above which both the limitation on specified service businesses and the wage limit apply. The threshold amount is $157,500 for individual taxpayers and $315,000 for married taxpayers filing jointly. Phase-ins apply: that means that the benefit decreases as income increases.

If you are a specified service business and your taxable income exceed the threshold amount plus the phase in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly), then you lose the deduction completely. In that case, the old pass-through rules apply meaning you pay tax using your individual tax rate.

So…What is a specified service trade? A specified service trade or business is any business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” I like to think of it this way: if the success of your business depends on you and not on something that you sell, you’re pretty much included (except for engineering and architecture services, which were specifically excluded). The definition also includes a business where the performance of services consists of investing and investment management trading, or dealing in securities, partnership interests, or commodities.

For all other businesses, if your taxable income exceeds the threshold amount, the wage (and capital) limits begin to kick in. The wage (and capital) limit applies fully for a taxpayer (other than a specified service business) when taxable income exceeds the threshold amount plus the phase in range ($207,500 for individual taxpayers and $415,000 for married taxpayers filing jointly).

And yes, there are a million “what ifs?” to be considered there is no one size fits all, each business has different circumstances to consider.

Remember, these deductions from income reduce your taxable income on your individual return. It does not change how you calculate your taxable income inside your business. Business expenses remain deductible.

If you have any questions regarding tax planning let’s setup a meeting to chat.

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