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Your Complete Guide to the
2018 Tax Changes
Matthew Frankel, The Motley Fool
Motley
FoolDecember 30, 2017
President Trump recently signed the tax
reform bill into law, and it makes major changes to the U.S. tax code for both
individuals and corporations. In fact, the bill represents the most significant
tax changes in the United States in more than 30 years.
With that in mind, here's a guide to
all of the changes that will go into effect -- the new tax brackets, modified
deductions and credits, corporate tax changes, and more.
The 2018 tax brackets
In President Trump's campaign tax plan,
he proposed reducing the number of tax brackets from seven to three, and the
House of Representatives' original tax reform bill contained four brackets.
However, the final bill kept the seven-bracket structure but with mostly lower
tax rates.
Marginal Tax Rate
|
Single
|
Married Filing Jointly
|
Head of Household
|
Married Filing Separately
|
10%
|
$0-$9,525
|
$0-$19,050
|
$0-$13,600
|
$0-$9,525
|
12%
|
$9,525-$38,700
|
$19,050-$77,400
|
$13,600-$51,800
|
$9,525-$38,700
|
22%
|
$38,700-$82,500
|
$77,400-$165,000
|
$51,800-$82,500
|
$38,700-$82,500
|
24%
|
$82,500-$157,500
|
$165,000-$315,000
|
$82,500-$157,500
|
$82,500-$157,500
|
32%
|
$157,500-$200,000
|
$315,000-$400,000
|
$157,500-$200,000
|
$157,500-$200,000
|
35%
|
$200,000-$500,000
|
$400,000-$600,000
|
$200,000-$500,000
|
$200,000-$300,000
|
37%
|
Over $500,000
|
Over $600,000
|
Over $500,000
|
Over $600,000
|
Data source: Joint Explanatory
Statement of the Committee of Conference.
Marginal Tax Rate
|
Single
|
Married Filing Jointly
|
Head of Household
|
Married Filing Separately
|
10%
|
$0-$9,525
|
$0-$19,050
|
$0-$13,600
|
$0-$9,525
|
15%
|
$9,525-$38,700
|
$19,050-$77,400
|
$13,600-$51,850
|
$9,525-$38,700
|
25%
|
$38,700-$93,700
|
$77,400-$156,150
|
$51,850-$133,850
|
$38,700-$78,075
|
28%
|
$93,700-$195,450
|
$156,150-$237,950
|
$133,850-$216,700
|
$78,075-$118,975
|
33%
|
$195,450-$424,950
|
$237,950-$424,950
|
$216,700-$424,950
|
$118,975-$212,475
|
35%
|
$424,950-$426,700
|
$424,950-$480,050
|
$424,950-$453,350
|
$212,475-$240,025
|
39.6%
|
Over $426,700
|
Over $480,050
|
Over $453,350
|
Over $240,025
|
Data source: IRS.
The marriage penalty is
(mostly) gone
One thing to notice from these brackets
is that the so-called marriage penalty, which many Republican leaders
(including President Trump) wanted to eliminate, is
almost absent.
If you're not familiar, here's a
simplified version of how the marriage penalty works. Let's say that two single
individuals each earned a taxable income of $90,000 per year. Under the old
2018 tax brackets, both of these individuals would fall into the 25% bracket
for singles. However, if they were to get married, their combined income of
$180,000 would catapult them into the 28% bracket. Under the new brackets, they
would fall into the 24% marginal tax bracket, regardless of whether they got
married or not.
In fact, the married filing jointly
income thresholds are exactly double the single thresholds for all but the two
highest tax brackets in the new tax law. In other words, the marriage penalty
has been effectively eliminated for everyone except married couples earning
more than $400,000.
Standard deduction and
personal exemption
While it's being sold as a tax cut, the
higher standard deduction really falls more under the category of a
simplification.
Yes, the standard deduction has roughly
doubled for all filers, but the valuable personal exemption has been
eliminated. For example, a single filer would have been entitled to a $6,500
standard deduction and a $4,150 personal exemption in 2018, for a total of
$10,650 in income exclusions. Under the new tax plan, they would just get a
$12,000 standard deduction. Is it better? Yes. But it's not really
"doubled."
Having said that, here's a comparison
between the standard deductions of the new and old tax laws.
Tax Filing Status
|
Previous Standard Deduction (Set to
take effect in 2018)
|
New Standard Deduction
|
Single
|
$6,500
|
$12,000
|
Married Filing
Jointly
|
$13,000
|
$24,000
|
Married Filing
Separately
|
$6,500
|
$12,000
|
Head of
Household
|
$9,350
|
$18,000
|
Data source: IRS and Tax Cuts and Jobs
Act.
Capital gains taxes
The general structure of the capital gains tax system, which applies to things
like stock sales and sales of other appreciated assets, isn't changing.
However, there are still a few important points to know.
For starters, short-term capital gains
are still taxed as ordinary income. Since the tax brackets applied to ordinary
income have changed significantly, as you can see from the charts above, your
short-term gains are likely taxed at a different rate than they formerly were.
Also, under the new tax law, the three capital
gains income thresholds don't match up perfectly with the tax brackets. Under
previous tax law, a 0% long-term capital gains tax rate applied to individuals
in the two lowest marginal tax brackets, a 15% rate applied to the next four,
and a 20% capital gains tax rate applied to the top tax bracket.
Instead of this type of structure, the
long-term capital gains tax rate income thresholds are similar to where they
would have been under the old tax law. For 2018, they are applied to maximum
taxable income levels as follows:
Long-Term Capital Gains Rate
|
Single Taxpayers
|
Married Filing Jointly
|
Head of Household
|
Married Filing Separately
|
0%
|
Up to $38,600
|
Up to $77,200
|
Up to $51,700
|
Up to $38,600
|
15%
|
$38,600-$425,800
|
$77,200-$479,000
|
$51,700-$452,400
|
$38,600-$239,500
|
20%
|
Over $425,800
|
Over $479,000
|
Over $452,400
|
Over $239,500
|
Data source: Tax Cuts and Jobs Act.
Finally, the 3.8% net investment income
tax that applied to high earners remains the same and with the exact same
income thresholds. If Congress is successful in repealing the Affordable Care
Act, this could potentially go away, but it remains for the time being.
Tax breaks for parents
I mentioned earlier that the personal
exemption is going away, which could disproportionally affect larger families.
However, this loss and more should be
made up for by the expanded Child Tax Credit, which is available for qualified
children under age 17. Specifically, the bill doubles the credit from $1,000 to
$2,000, and also increases the amount of the credit that is refundable to
$1,400.
In addition, the phaseout threshold for
the credit is dramatically increasing.
Tax Filing Status
|
Old Phaseout Threshold
|
New Phaseout Threshold
|
Married Filing
Jointly
|
$110,000
|
$400,000
|
Individuals
|
$75,000
|
$200,000
|
Data source: Tax Cuts and Jobs Act.
If your children are 17 or older or you
take care of elderly relatives, you can claim a nonrefundable $500 credit,
subject to the same income thresholds.
Furthermore, the Child and Dependent Care Credit,
which allows parents to deduct qualified child care expenses, has been kept in
place. This can be worth as much as $1,050 for one child under 13 or $2,100 for
two children. Plus, up to $5,000 of income can still be sheltered in a
dependent care flexible spending account on a pre-tax basis to help make child
care more affordable. You can't use both of these breaks to cover the same
child care costs, but with the annual cost of child care well over $20,000 per
year for two children in many areas, it's safe to say that many parents can
take advantage of the FSA and credit,
both of which remain in place.
Education tax breaks
Earlier versions of the tax bill called
for reducing or eliminating some education tax breaks, but the final version
does not. Specifically, the Lifetime Learning Credit and Student Loan Interest Deduction are
still in place, and the exclusion for graduate school tuition waivers survives
as well.
One significant change is that the bill
expands the available use of funds saved in a 529 college savings plan to include levels of
education other than college. In other words, if you have children in private
school, or you pay for tutoring for your child in the K-12 grade levels, you
can use the money in your account for these expenses.
Mortgage interest,
charitable contributions, and medical expenses
These three deductions remain, but
there have been slight tweaks made to each.
·
First, the mortgage
interest deduction can only be taken on mortgage debt of up to $750,000, down
from $1 million currently. This only applies to mortgages taken after Dec. 15,
2017, preexisting mortgages are grandfathered in. And the interest on home
equity debt can no longer be deducted at all, whereas up to $100,000 in home
equity debt could be considered.
·
Next, the charitable
contribution deduction is almost the same, but with two notable changes. First,
taxpayers can deduct donations of as much as 60% of their income, up from a 50%
cap. And donations made to a college in exchange for the right to purchase
athletic tickets will no longer be deductible.
·
Finally, the threshold for the medical
expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. In other
words, if your adjusted gross income is $50,000, you can now deduct any
unreimbursed medical expenses over $3,750, not $5,000 as set by prior tax law.
Unlike most other provisions in the bill, this is retroactive to the 2017 tax
year.
The SALT deduction
Perhaps the most controversial aspect
of tax reform on the individual side was the fate of the SALT deduction. Early
versions of the bill proposed eliminating the deduction (which stands for
"state and local taxes"), which didn't sit well with some key
Republicans in high-tax states.
The final version of the bill keeps the
deduction, but limits the total deductible amount to $10,000, including income,
sales, and property taxes.
Deductions that are
disappearing
While many deductions are remaining
under the new tax law, there are several that didn't survive, in addition to
those already mentioned elsewhere in this guide. Gone for the 2018 tax year are
the deductions for:
·
Casualty and theft losses (except those attributable to a
federally declared disaster)
·
Unreimbursed employee expenses
·
Tax preparation expenses
·
Other miscellaneous deductions previously subject to the 2% AGI
cap
·
Moving expenses
·
Employer-subsidized parking and transportation reimbursement
Itemizing won't be
worthwhile anymore for millions of households
While we're on the topic of deductions,
many of these may now be a moot point, even to taxpayers who have been using
them for years. Even though most major deductions are being kept in place, the
higher standard deductions will make itemizing not worthwhile for millions of
households.
For example, let's say that a married
couple pays $8,000 in mortgage interest, makes $4,000 in charitable
contributions, and pays $5,000 in state and local taxes. This adds up to
$17,000 in deductions, which when compared with the previous $13,000 standard
deduction makes itemizing look like a smart idea.
However, with the new $24,000 standard
deduction for married couples, it would no longer be worth it to itemize.
In fact, the Joint Committee on
Taxation estimates that 94% of households will claim the standard deduction in
2018, up from about 70% now.
Obamacare penalties will be
going away
Republicans were unsuccessful in their
efforts to repeal the Affordable Care Act, otherwise known as Obamacare, in
2017. However, the tax reform bill repeals the individual mandate, meaning that
people who don't buy health insurance will no longer have to pay a tax penalty.
It's worth noting that this change
doesn't go into effect until 2019, so for 2018, the "Obamacare penalty"
can still be assessed.
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 these will be able to deduct 20% of their
pass-through income. In other words, if you own a small business and it
generates $100,000 in profit in 2018, you'll be able to deduct $20,000 of it
before the ordinary income tax rates are applied.
There are phaseout income limits that
apply to "professional services" business owners such as lawyers,
doctors, and consultants, which are set at $157,500 for single filers and
$315,000 for pass-through business owners who file a joint return.
Alternative minimum tax,
version 2.0
The alternative minimum tax, or AMT, was implemented
to ensure that high-income Americans paid their fair share of taxes, regardless
of how many deductions they could claim. Essentially, higher-income households
need to calculate their taxes twice -- once under the standard tax system and
once under the AMT -- and pay whichever is higher.
The problem is that the AMT exemptions
weren't initially indexed for inflation, so over time, the AMT started to apply
to more and more people, including the middle class, which it was never
intended to affect.
So, the tax reform bill permanently
adjusts the AMT exemption amounts for inflation in order to address this
problem, and makes them significantly higher initially in 2018. Here's how the
AMT exemptions are changing for 2018.
Tax Filing Status
|
2017 AMT Exemption Amount
|
2018 AMT Exemption Amount
|
Single or Head
of Household
|
$54,300
|
$70,300
|
Married Filing
Jointly
|
$84,500
|
$109,400
|
Married Filing
Separately
|
$42,250
|
$54,700
|
Data source: Tax Cuts and Jobs Act.
In addition, the income thresholds at
which the exemption amounts begin to phase out are dramatically increased.
Currently, these are set at $160,900 for joint filers and $120,700 for
individuals, but the new law raises these to $1 million and $500,000,
respectively.
A different way to
calculate inflation
Perhaps one of the most significant,
but least talked-about, provisions in the new tax bill is the switch in the way
inflation is calculated.
Under the previous tax law, inflation
is measured by the consumer price index for all urban consumers, also known as
the CPI-U, which essentially tracks the cost of goods and services that affect
the typical household.
The new law adopts a metric called the
Chained CPI. My colleague Sean Williams does a great job of explaining the Chained CPI, but essentially
the key difference is that the Chained CPI assumes that if a particular good or
service gets too expensive, consumers will trade down to a cheaper alternative.
The effect is that the Chained CPI
grows slower than the traditionally used CPI-U. This means that tax bracket
thresholds will rise slower, as will other IRS inflation-sensitive numbers,
such as eligibility limits for certain deductions and credits.
The estate tax exemption
The estate tax already applied to a small
percentage of households. Essentially, the 40% estate tax rate applied only to
the portion of an estate that was valued at $5.6 million or more per
individual, or $11.2 million per married couple.
However, the new tax law exempts even
more households by doubling these exemptions. Now, for 2018, individuals get a
$11.2 million lifetime exemption and married couples get to exclude $22.4
million. As you can probably imagine, this won't leave too many families paying
the estate tax.
Most of the individual tax
breaks are temporary
So far, we've discussed the tax changes
that will affect individuals. It's also important to point out that most of the
changes to individual taxes made by the bill are temporary -- they're set to
expire after the 2025 tax year.
The notable exception is the change to
the Chained CPI as a means to calculate inflation. In simple terms, this means
that the income thresholds for each marginal tax bracket will rise more slowly
than they previously would, which will presumably make a greater portion of
each worker's income subject to higher marginal tax rates over time.
The combination of the temporary nature
of the tax cuts and the permanent switch to the Chained CPI is expected to have
the eventual effect of higher taxes
on the middle class, as compared to current tax law.
Corporate tax rates
So far, we've discussed individual tax
reform, but the most dramatic changes made by the bill are on the corporate
side.
For starters, the bill lowers the
corporate tax rate to a flat 21% on all profits. This is not only a massive tax
cut, but is a major simplification as compared to the 2017 corporate tax
structure.
Taxable Income Range
|
Marginal Corporate Tax Rate (2017)
|
$0-$50,000
|
15%
|
$50,000-$75,000
|
25%
|
$75,000-$100,000
|
34%
|
$100,000-$335,000
|
39%
|
$335,000-$10,000,000
|
34%
|
$10,000,000-$15,000,000
|
35%
|
$15,000,000-$18,333,333
|
38%
|
$18,333,333
and above
|
35%
|
Data source: IRS.
The global average corporate tax rate
is about 25%, so this move is designed to make the U.S. more globally
competitive, which should in turn help keep more corporate profits (and jobs)
in the United States.
In addition to these changes, the
corporate AMT of 20% has been repealed.
A territorial tax system
The tax reform bill also changes the
U.S. corporate tax system from a worldwide one to a territorial system.
Currently, U.S. corporations have to pay U.S. taxes on their profits earned
abroad, and the new system will end this effective double-taxing of foreign
profits.
Repatriation of foreign
cash and assets
As a result of the worldwide tax
system, which makes foreign profits subject to the 35% top corporate tax rate,
there is about $2.6 trillion in U.S. corporations' foreign profits held
overseas.
In order to bring this money back to
the United States, the new tax law sets a one-time repatriation rate of 15.5%
on cash and equivalent foreign-held assets and 8% on illiquid assets like
equipment, payable over an eight-year period.
This could be big news for companies
like Apple,
which has more than $200 billion parked overseas.
When all of this goes into
effect, and when you'll notice the changes
To be clear, unless I've noted
otherwise, the changes made by the tax reform bill go into effect for the 2018
tax year, which means you'll first notice them on your tax return that you file
in 2019.
However, you can expect to see a change
in your paychecks after Jan. 1, as employers will modify their withholdings to
adapt to the newly passed 2018 tax brackets.
More From The Motley Fool
Matthew Frankel owns shares of Apple.
The Motley Fool owns shares of and recommends Apple. The Motley Fool has the
following options: long January 2020 $150 calls on Apple and short January 2020
$155 calls on Apple. The Motley Fool has a disclosure policy.
~~~~~~~~~
(As
with any of these informative articles, anyone who needs someone to talk to
about
this
very subject contact me and I can direct you to a knowledgeable advisor).
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Full post disclaimer in left column. PCN Home Page is located at: http://pcn.homestead.com/home01.html
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