All About Tax Reform 2018

As the tax filling is nearing we bring you the important changes made in the tax bill 2018. 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.

All The Changes Made In Tax Bill

Here we have mentioned all the changes introduced in the tax bill. The new rules have come into effect from Jan. 1, 2018.

Rule

Old Rule

New Rule

529 College Savings Plan

Previously, 529 plan savings could only be used on qualified higher education expenses.

Now you can use 529 savings for private K-12 schooling. According, to the new rule you can withdraw up to $10,000 a year per student for education cost.

Aca Individual Mandate

As of now consumers who did not qualify for an exemption and doesn’t want to purchase insurance faces a range of tax penalties.

But now the individual mandate is out. Consumers who do not purchase health insurance will no longer face penalties.

Alimony

The old rule says the payer of alimony can deduct payments from their income and the person receiver have to include them as payment.

Now, any divorce signed or modified on or after Jan. 1, 2018. The payer doesn’t get to deduct them, and the recipient does not claim the payments as income.

Alternative Minimum Tax

The exemption amount is $84,500 for married joint-filing couples, $54,300 for single filers and $42,250 for married couples filing separately. The ATM exemption phases out at $120,700, $160,900 and $80,450 respectively.

As per the new rule ATM will affect only a few families. Now married couples filing jointly will be exempt from the ATM starting at $109,400. Exemption starts at $70,300 for all other taxpayers and the phase out rises to $1,000,000 for married couples filing jointly, and $500,000 for all other taxpayers.

Bicycle Commuting

Earlier, tax payers could exclude up to $20 a month of qualified bicycle commuting reimbursements from their gross income. Workers can claim exclusion in any month, when they use the bicycle regularly to commute to work and do not receive travel allowance.

The exclusion is suspended through 2025.

Child Tax Credit

As per the old rule the child tax credit is $1000 per child under the age of 17. The credit reduces by $50 for each $1000 a taxpayer earns over certain thresholds. The phase-out thresholds start at a modified adjusted gross income (AGI) over $75,000 for single individuals and heads of household, $110,000 for married couples filing jointly and $55,000 for married couples filing separately.

The new rule doubles the child tax credit to $2000 per qualifying child and as a refundable credit $114,00 can be received. Also, it includes a $500 nonrefundable credit per dependent other than a qualifying child. The credit begins to phase out at an AGI over $200,000, for married couples, the phase-out starts at an AGI over $400,000.

Corporate Taxes

According to old rule the top corporate tax rate is 35% on taxable income more than $10 million.

Now the top corporate tax rate is brought down to 21%.

Estate Taxes

The top tax rate was 40% and estates up to $5.49 million in value were exempted from tax till now.

The new rule doubles the exemption now, estates up to $11.2 million are exempt from the tax.

Gains On Home Sales

A homeowner can exclude up to $2,50,000 of gains made from selling their primary residence, and $500,000, if married filling jointly. The exemption is allowed only if they lived in the home for at least two of the five years before sale.

Now, the exemption amount remains the same, but they have to stay for more years. Now owners have to use the home as their primary residence for five of the eight years before the sale and can only be claimed once in a five-year. The new rule expires on Dec. 31, 2025.

Medical Expenses

Till date taxpayers could deduct out-of-pocket medical expenses that exceed 10% of their AGI or 7.5% if the individual or their spouse is a senior citizen.

The threshold for all the taxpayers to claim a deduction is been reduced to 7.5% of individual’s AGI. The change applies to taxable years from Dec. 31, 2016 to Jan. 1, 2018.

Miscellaneous Tax Deduction

Till now taxpayers could claim an itemized deduction of the expenses paid for tax preparation. Workers could deduct unreimbursed business expenses. Also, taxpayers could deduct fees paid to advisors and brokers to manage their money.

But now, all this claim and deduction are suspended till 2025.

Mortgage And Home Equity Loan Interest Deduction

As per the old rule homeowners could deduct up to $1 million against interest paid on mortgages on a taxpayer’s principal residence and other qualified residence.

Now, homeowners can include mortgage interest paid on up to $750,000 of principal value on a new home. The $1 million caps remains for owners who took mortgage on or before Dec. 15, 2017. Also, homeowners can deduct interest paid on a home equity line of credit or home equity loan, if the loan is used for buying, building or home improvement.

Moving Expense

Now taxpayers are allowed to deduct moving expense, if the move is of a certain distance from the taxpayer’s previous home and the job in the new location is full-time.

According to the new law moving expenses deduction is suspended through 2025. Though, this deduction and exclusions are available for the military.

Pas-Through Businesses

Earlier all pass-through business owners’ income was subject to regular personal income tax.

Now, pass-through business owners can deduct up to 20% of their qualified business income from a partnership, S corporation or sole proprietorship. For fullest deduction the eligibility criteria is $157,500 for single individuals and $315,000 for married couples.

Personal Casualty Or Theft

Currently deduction on uninsured losses is allowed for the loss above $100 if property is on fire, shipwreck, flood, storm, earthquake or other natural disaster. But, is allowed only if the total loss amounts to greater than 10% of the taxpayers AGI.

Now the deduction is only allowed if the loss is occurred during a federally declared disaster, through 2025.

Personal Exemption

Till now taxpayers were allowed to reduce their AGI by claiming personal exemptions, generally for the taxpayer, their spouse and their dependents.

All Personal exemptions are suspended through 2025.

Standard Deduction

Till now, taxpayers who do not itemized were allowed to claim the current standard deduction of $6,350 for single individuals, $9,350 for heads of household or $12,700 for married couples filing jointly

The new rule doubles the deduction amount for all.

State And Local Tax (SALT) Deduction

Currently taxpayers can include state and local property, income and sales taxes as itemized deductions.

The new law sets a limit of $10,000 for claiming an itemized deduction in combined state and local income, sales and property taxes, starting in 2018 through 2025. Taxpayers cannot get around these limits by prepaying 2018 state and local income taxes while it is still 2017.

Student Loan Debt Discharge

Till date student loan debt discharged due to death or disability was taxed as income.

Now, student loan debt discharged due to death or disability after Dec. 31, 2017, will not be taxed as income. The rule lasts through 2025.

Tax Brackets And Income Taxes

Currently there are 7 tax brackets, with highest of 39.6% for taxpayers earning above over $418,400 for individuals and $470,700 for married couples filing taxes jointly.

The new rules retain seven tax brackets, but the brackets have been modified to lower most individual income tax rates. The new brackets expire in 2027.

2017 Tax Brackets

New Tax Brackets

Single Individuals

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$9,325 or less

10%

$9,525 or less

10%

$9,326-$37,950

15%

$9,526-$38,700

12%

$37,951-$91,900

25%

$38,701-$82,500

22%

$91,901-$191,650

28%

$82,501-$157,500

24%

$191,651-$416,700

33%

$157,501-$200,000

32%

$416,701-$418,400

35%

$200,001-$500,000

35%

Over $418,400

39.60%

Over $500,000

37%

Married Individuals Filing Joint Returns and Surviving Spouses

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$18,650 or less

10%

$19,050 or less

10%

$18,651-$75,900

15%

$19,051-$77,400

12%

$75,901-$153,100

25%

$77,401-$165,000

22%

$153,101-$233,350

28%

$165,001-$315,000

24%

$233,351-$416,700

33%

$315,001-$400,000

32%

$416,701-$470,700

35%

$400,001-$600,000

35%

Over $470,700

39.60%

Over $600,000

37%

Heads of Households

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$13,350 or less

10%

$13,600 or less

10%

$13,351-$50,800

15%

$13,601-$51,800

12%

$50,801-$131,200

25%

$51,801-$82,500

22%

$131,201-$212,500

28%

$82,501-$157,500

24%

$212,501-$416,700

33%

$157,501-$200,000

32%

$416,701-$444,550

35%

$200,001-$500,000

35%

Over $444,550

39.60%

Over $500,000

37%

Married Individuals Filing Separate Returns

Taxable Income

Tax Bracket

Taxable Income

Tax Bracket

$9,325 or less

10%

Not over $9,525

10%

$9,326-$37,950

15%

$9,525-$38,700

12%

$37,951-$76,550

25%

$38,701-$82,500

22%

$76,551-$116,675

28%

$82,501-$157,500

24%

$116,676- $208,350

33%

$157,501-$200,000

32%

$208,351-$235,350

35%

$200,001-$300,000

35%

Over $235,350

39.60%

Over $300,000

37%

Tax Deduction That Are Not Changed

  • Teacher deduction – Teachers are allowed to deduct $250 for unreimbursed expenses for classroom supplies or school materials from their taxable income.

  • Electric Car – Owners of the electric car bought after 2010 are eligible for a tax credit of up to $7,500, depending on the battery capacity.

  • Adoption assistance Adoptive parents are allowed a tax credit and employer-provided benefits up to $13,570 per eligible child in 2017.

  • Student loan interest deduction – Student loan borrowers may deduct up to $2,500 on the interest paid for student loans every year.

Find out more about Tax Reform 2018 by visiting the Bharti Sudan CPA website.

All About Tax Reform 2018