Last year's Tax Cut and Jobs Act of 2017 made significant changes to federal tax laws -- rejiggering tax brackets, capping some tax deductions and eliminating a few others.
Those changes will determine how much money people can write off on their taxes when they file in 2019. To avoid a nasty surprise, taxpayers should make a date with their financial planners or accountants before the end of the year to huddle about any last-minute strategies and review their most recent tax return.
"The big change for individuals is with deductions," says Craig Richards, managing director and director of tax services at Fiduciary Trust Company International in New York. "A lot of things that we've talked about in the past, they're not there anymore. For example, prepaying your real estate taxes is not going to do you any good."
Although the standard deduction nearly doubled to $12,000 for single tax filers and $24,000 for married couples filing jointly, key deductions like state and local taxes and mortgage interest were capped at $10,000. That's going to hurt people in states where property and or income taxes are high. Further, the tax code suspends miscellaneous deductions, such as certain types of home equity interest deductions and fees paid to accountants and investment advisors -- these can no longer be written off.
[Read: How to Avoid Investment Tax Shock.]
According to tax experts, here are the top six key changes in the new federal tax code:
-- Tax rate changes.
-- Charitable and medical deductions.
-- Alimony payments.
-- Child tax credits.
-- Business income.
-- Estate planning changes.
Tax Rate Changes
Most tax brackets for adjusted gross income, the amount earned after deductions, were lowered. Tim Steffen, director of advanced planning for Baird in Milwaukee, says while the marginal tax rate is lower, taxable income for most people will increase because of fewer tax deductions.
Because tax brackets are lower, Steffen says taxpayers should review federal withholding payments to avoid underpayment penalties. The IRS provides revised tables for employers to use when withholding taxes from employee's income. "While the total tax liability may be down this year, those subject to withholding likely had less tax taken out of their income for 2018," he says. "As a result, comparing a net tax refund -- or balance due -- for 2018 versus 2017 may not give an accurate reading on the impact."
There was no change in the long-term capital gains tax rate, so tax levies on investment income for securities held for more than a year or qualified dividends is unchanged, Richards says.
Charitable and Medical Deductions
Gifts to charity can be deducted -- if a taxpayer itemizes -- to reduce a tax burden. Stephen Henley, national tax practice leader at CBIZ MHM in Atlanta, says for taxpayers who are nearing the standard deduction threshold, charitable deductions could push them over the edge to allow itemization. For people who can afford it, the experts recommend bunching charitable donations -- giving two years of gifts in one year.
Henley says the threshold to deduct medical expenses temporarily fell from 10 to 7.5 percent, which helps people who have a lot of medical bills. For individuals who don't have businesses or other income, the charitable and medical deductions are the only other ways to possibly push these taxpayers above the standard deduction. If these two line items aren't enough to push them over the threshold, then charitable gifts and medical expenses aren't deductible.
For people who are in the process of getting a divorce, 2018 is the last year that alimony payments can be deducted from their taxes, experts say. Divorces granted in December 2018 will be grandfathered into the new law. But starting in January 2019, any new or modified divorces are no longer a tax write-off.
Child Care Credits
The tax code temporary removed the $4,050 personal exemption for years 2018 to 2025. Even so, Steffen says people should still be identifying those dependents because the child tax credit was raised to $2,000 from $1,000 for children under age 17. A separate $500 credit is available for dependents who don't qualify for the $2,000 credit. He says the total credit starts being phased out for couples with incomes over $400,000 and singles over $200,000 -- that's up from $110,000 and $75,000, respectively, from the 2017 tax year.
Business owners, even people who just have side gigs, may benefit from tax code changes, depending on how much they make. People who have either a sole proprietorship, a limited-liability corporation, partnership or an S-corporation have more opportunities to deduct expenses, Henley says. Profitable business owners who plan to purchase new assets, such as equipment, can deduct 100 percent depreciation, which he says is very favorable. Henley adds it makes sense to buy equipment like new computers purchased this year to claim the deduction.This new law applies to certain products the business owner bought after Sept. 27, 2017.
Under the new tax code, small businesses can reduce their federal income tax rate on their profits by 20 percent if their taxable income on their personal return is under $157,000 for singles, and less than $315,000 for married couples filing jointly, says John Vento, president of New York City-based Comprehensive Wealth Management.
This deduction also applies for people who invested in a master limited partnership or a real estate investment trust, he says. The taxpayers can deduct an aggregated amount of qualified REIT dividends, qualified publicly traded partnership income and qualified cooperative dividends for the taxable year.
Estate Tax Changes
For high-net-worth individuals looking to make estate-planning decisions, a temporary change in the tax code doubled the inheritance tax exemption to $11.18 million for 2018, up from an expected amount of $5.6 million. Married couples can combine exemptions to have $22.36 million in exemptions. This increased exemption is scheduled to fall back to $5.6 million in 2026.
"Making large gifts under this provision should be done only after a thorough review of the overall estate plan, but should be strongly considered by those who are likely to pay an estate tax," Steffen says.
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