2018 Tax Changes Individuals and Businesses Should Know About

February 5, 2018

2018 Tax Changes for INDIVIDUALS

Effective date: 1/1/18 for most items. Most of it expires 1/1/26.

State & Local Income Taxes plus Real Estate Tax on primary home, plus Personal Property Tax capped at $10,000 ($5,000 for Married Filing Separate).

Charitable Contributions

  • Repeals the deduction for contributions made for university athletic seats.
  • Repeals the exception to the contemporaneous written acknowledgement requirement for contributions made in tax years after December 31, 2016.

2% Itemized Deductions Eliminated

  • Tax Preparation fees.
  • Unreimbursed Business/Work expenses, including tools, union dues and home office.  Employees NEED to get reimbursed for these expenses.
  • Continuing education expenses.
  • Job search expense.
  • Licensing and dues fees.
  • Investment expenses.
  • Legal fees related to employment or income production/collection.

New Standard Deduction for 2018

  • Single: $12,000.
  • Head of Household: $18,000.
  • Married Filing Joint: $24,000.
  • Personal Exemptions suspended!

Mortgage Interest Deduction

  • Limited to $750,000 for Primary and Secondary home new mortgages obtained after 12/15/17.
  • Home Equity Interest Deduction is no longer deductible, except for paying down old balance.

Alimony Effective for divorces after 12/31/18 – Alimony is no longer a deduction to paying ex-spouse and no longer income to recipient ex-spouse.

Moving Expense Deduction is no longer allowed.  Also applies to employers.

Casualty Loss Deduction is no longer allowed except in Presidential Declared Disaster Areas.

Medical Expense Deductions Adjusted Gross Income threshold reduced from 10% to 7.5% but only for 2018 & 2019.

Alternative Minimum Tax

  • Exempt Income thresholds increased from $54,300 (Single)/$84,500 (Married Filing Joint) to $70,300 (Single)/$109,400 (Married Filing Joint).
  • Alternative Minimum Tax Exemption Phase-out’s increased from $120,700 (Single)/$160,900 (Married Filing Joint) to $500,000 (Single)/$1 Million (Married Filing Joint). Note: This means that if your income exceeds the $500,000 or $1 million phase-out amount, you are no longer eligible to exclude $70,300 or $109,400 from Alternative Minimum Tax.

2018 Child Tax Credit

  • Doubles from $1,000 to $2,000 per child, for children under age 17.
  • This credit is refundable up to $1,400 if you qualify (you meet the low income tests).
  • Phase-out increases from $75,000 (Single)/$110,000 (Married Filing Joint) to $200,000 (Single)/$400,000 (Married Filing Joint).

529 Plans You are now allowed to use $10,000 per year to pay for K-12 education tuition, materials and tutoring.

Kiddie Tax is modified. 

  • Child’s taxable earned income is taxed under rates for Single.
  • Child’s taxable net unearned income is taxed according to brackets applicable to trusts and estates.

Obamacare Penalty/Individual Mandate is eliminated effective 1/1/19.

New Tax Rates & Brackets – Most rates decreased and the brackets are expanded.

Estate Tax Exemption Increased from $5,490,000 (Single)/$10,980,000 (Married Couples) to $11,000,000 (Single)/$22,000,000 (Married Couples), effective 1/1/18.

2018 Tax Code Changes for PASS THROUGH ENTITIES

Effective Date: 1/1/18. Expires 1/1/26.

U.S.-Based LLCs, S Corps, Partnerships and Sole Proprietors, Real Estate Investors, Trusts and Estates, REITs and Qualified Cooperatives

  • Congress really, really complicated this area!  I believe there will be changes/clarification on some this in the future.
  • 20% deduction allowed on individual income tax returns. This 20% is applied to your share of the taxable income from a Pass Through Entity.
  • Deduction is phased out if your income is too high: phase-out begins at $157,500 (Single)/$315,000 (Married Filing Joint).
  • Non-Service Businesses who exceed the phase-out amount default to this limitation:
     - 50% x wages reported on pass through business or
     - 25% x wages reported on pass through business plus 2.5% x tax basis of depreciable property.
  • SE Tax calculation is unaffected by the above ‘deduction’.

2018 Tax Updates for C CORPORATIONS

  • Effective 1/1/18 and are permanent - no expiration date!
  • 21% flat tax replaces graduated tax brackets.
  • Repealed the AMT tax for C Corps.
  • Personal Service Corps taxed the same as any C Corp.
  • Changes to taxes on foreign profits.

OTHER Business Tax Updates for 2018

50% Entertainment Deduction is no longer allowed.  Tickets to the Royals…no deduction allowed.

Business Meals are 50% deductible, including in-house employee meals (some were 100%)

Like-Kind Exchange allowed only with respect to real property not held primarily for sale. Repealed like-kind exchange for personal property (trucks, etc).

Section 179 expensing is increased to $1M, phases out starting at $2.5M.

100% Write-Off (Bonus Depreciation) of ‘Qualified’ Fixed Assets, effective 9/28/2017.  Allowed for new and used equipment.

Luxury Auto Depreciation limits expanded.  First year goes to $10,000 from $3,160.

Net Operating Loss 

  • Repealed carryback of NOL.
  • Carryover to offset 80% of taxable income.
  • Can carryforward indefinitely.

Farmers – several changes to this.  Changes to asset lives, loss provisions, etc.

Long-Term Contracts – Percentage-of-completion required for $25M revenue (Old law was $10M).

Cash Method of Accounting gross receipts test increased to $25M

Domestic Production Activities Deduction (DPAD) repealed effective:

  • C Corps – for tax years beginning after 12/31/2018.
  • Non C Corps – for tax years beginning after 12/31/2017.

FMLA – New general business credit of 12.5% of wages paid to employees on FMLA if rate is 50% of wages normally paid.

Penalties 

  • Accuracy Related Penalty exists if underpayment exceeds the greater of 5% (was 10%) of tax required to be shown on the return, or $5,000.  This is a big penalty and will affect a lot of audits.  This is on top of other penalties and interest assessed.
  • Governments must now issue Form 1099 to the IRS and taxpayers for fines received in excess of $600.

This list is not all of the changes, and does not include all of the details and specifics, therefore should not be used verbatim without discussing the facts and your circumstances with us or your other tax advisors.

Feel free to call our office at 816.224.4195 if you have any questions.

   

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