The Tax Cuts and Jobs Act signed into law in December of 2017 faces its initial big test on 2018’s tax returns, due next April. This is the first major overhaul of the Internal Revenue Code since the Tax Reform Act of 1986. Here are some things to be aware of:
- Personal exemptions are gone. There is no more ‘claiming’ dependents. No more every-other-year swapping of children under a divorce agreement, or determining whether a parent or sibling qualifies. All of that is a thing of the past, at least for now.
- Itemized deductions have been substantially altered. Such things as unreimbursed employee business expenses and other ‘miscellaneous’ deductions like wealth management and legal and professional fees have been eliminated altogether. And the deduction for state and local taxes in the aggregate has been capped at $10,000. That includes both income and real estate taxes.
- The standard deduction has been increased to $12,000 single/$24,000 joint/$18,000 for head of household taxpayers. This may convert many itemizers to those who will better benefit from these new amounts.
- Tax rates have been reduced across the board.
- There is a new 20% reduction of taxable business income from self-employment activities and other flow-through entities like partnerships and S corporations, although there are certain limitations.
- There is an opportunity to defer recognition of capital gains taxes by investing the proceeds into funds that invest in Opportunity Zones, which are disadvantaged, primarily urban, pockets that will benefit from revitalization. This can be huge for investors.
All of these changes can be opportunities but you might need professional guidance to identify them. Your tax adviser can model what your 2018 tax returns will look like given all the new law changes, and make suggestions as to how to capture benefits and mitigate downsides.
I would encourage you to initiate that planning process now.
Waiting until next April 15th won’t allow you to anticipate and make beneficial changes to your plans. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session.