In mid-December, Congress finally passed President Trump's proposed tax reform plan. These changes are actually the biggest that taxes have seen in over 30 years.
If you are an accountant, the following highlights of the new tax reform plan are important things you need to know as you prepare your clients' tax returns over the next few months. Here is a list of the major changes brought on by the tax reform plan.
- Americans will see big savings in federal taxes in the new year, but state taxes are going up. This means that for the average $70,000 a year earner, married filing jointly will still realize a nearly $1100 state and local tax saving.
- Small business owners are also getting a 20% tax deduction, which could help some expand their businesses, put more money in their pockets, or plan for their future. It could also help small business owners add to their retirement plans.
- The marriage penalty has almost disappeared. Whereas before it seemed almost like single people living together were penalized for getting married. Now married filing jointly income thresholds are exactly double the single thresholds for all but the two highest tax brackets in the new tax law. The marriage penalty has been effectively eliminated for everyone except married couples earning more than $400,000.
- The standard deduction has roughly doubled for all filers, but the personal exemption has been eliminated.
- Under the new tax law, the 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.
- As stated above, the personal exemption is going away, but this loss for parents 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.
- 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. ( Source, https://www.fool.com/taxes/2018/01/18/your-complete-guide-to-the-2018-tax-changes.aspx)
These of most of the major tax changes brought on by the new plan. For the complete list and details of each change, read this article from The Motley Fool. Hopefully we have covered the most important things accountants need to know about the new tax plan in order to provide accurate reporting and tax preparation for your clients.