-By Donovan Thiessen, CPA
The Tax Cuts and Jobs Act of 2017 was passed into law over a year ago. Although it has been in the news regularly since then, and despite the release of clarifying regulations, there is still surprise and confusion on the effects of the law.
Social and mainstream media have reported recent stories of taxpayers with higher tax liabilities and lower refunds than they saw on their 2017 income tax returns. One of the main reasons this happened was due to a change in the federal withholding tables in early 2018. Due to some of the changes highlighted in this article, the government estimated that most people would pay lower federal income tax in 2018 than they did in 2017. As such, they reduced the federal tax withholding rates, and took less taxes out of your paycheck. The upside was a higher net paycheck and increased discretionary spending which ultimately serves to increase GDP. This particular change has resulted in negative media for the tax reform. Many taxpayers are shocked at having to write a check to the Treasury when unaccustomed, and many others are receiving reduced refunds that were previously used to pay down debt, invest, and improve the home. By the end of this article, you should have a better idea of what is really happening with income taxes for 2018 and beyond.
Personal exemptions, standard deduction and the child tax credit
In 2017 each taxpayer and their dependents were eligible for an automatic personal exemption of 4,050 per person. The standard example is a two-parent household, and two dependent children ages 10 and 12 (“the Smith family”). The taxpayers would have claimed $16,200 in personal exemptions in 2017. Beginning in 2018 through 2025, those have been eliminated. If nothing else changed for these taxpayers, their taxable income increased by $16,200 from 2017 to 2018. As you compare your 2017 and your 2018 tax returns, this is a change you will notice regardless of filing as single or married.
Schedule A, which reports your itemized deductions, saw big changes in 2018. Most notably, the standard deduction was increased from 6,350 in 2017 to 12,000 in 2018 for single filers and 12,700 to 24,000 for married filing jointly. This will help reduce the time necessary to tally Schedule A deductions such as property, real estate and state income taxes, charitable deductions, medical expenses and gambling losses.
A particularly painful tax change is that the maximum deduction for State and Local taxes is now capped at $10,000. Taxpayers residing in states with income tax (California, Arizona, Oregon, amongst others) that pay more than $10,000 between income, property and real estate taxes may be hurt by this.
In years prior to 2018, employees could deduct unreimbursed business expenses such as vehicle fuel, client lunches, travel and incidental supplies. This no longer applies from 1/1/2018 to current. I recommend that employees make sure they can get reimbursed for an item, if not then have the company pay for the item directly. This includes cell phones, vehicle expenses and the home office deduction. In a recent return I prepared, this was a large deduction in 2017 that is now gone. My suggestion to the client was to negotiate a raise with the employer if you continue to pay for employment related expenses out of pocket and no tax benefit.
The child tax credit, which directly reduces the tax liability dollar for dollar, was expanded. In prior tax years taxpayers filing as married jointly would begin to phase out of this $1,000 per child tax credit beginning at modified adjusted gross income of $110,000. The new tax credit is $2,000 per child up until the child is age 17 at the end of the calendar year. Also, for married filing jointly the phase out begins at $400,000. This adjustment should easily make up for the loss of any personal exemptions for children, mentioned earlier. As a reminder, Tax credits are always preferable to tax deductions.
Schedule A – Itemized Deductions
The standard deduction was increased from 6,350 to 12,000 for single filers and from 12,700 to 24,000 for married filing joint (from 2017 to 2018). This change helps offset the removal of the personal exemptions.
Unreimbursed employee expenses, which include vehicle mileage deductions and home office expenses are now gone. Equivalent expenses for self-employed individuals are still in effect. Tax preparation fees, investment fees (fees paid to your financial advisor) are no longer deductible. Keep in mind that if part of your tax preparation fee involves accounting and tax work for rental properties or a self-employed business, the fees related to those activities can be deducted on the appropriate schedule (other than Schedule A).
The deduction for taxes has been capped at $10,000. This include state and local taxes, property taxes and personal property taxes (sales tax on a new vehicle for instance). For most people in Nevada, this may not be a big deal since we don’t have state income taxes. But for people with high property taxes and / or a second home, this could be painful. It is especially painful for residents of states with high income taxes such as California, New York and Illinois.
For businesses, the first-year bonus depreciation was expanded from 50% bonus to 100% bonus depreciation and it qualifies for used or new equipment. If you’ve purchased or plan to purchase equipment, vehicles, completed leasehold improvements to business property, in 2018 through 2025, you should consult with your tax advisor on the depreciation expense for tax purposes. It is likely that you’re able to accelerate the depreciation deduction for your fixed assets faster than in recent years.
Qualified Business Deduction
This new deduction is aimed at business owners. It came as a result of the top corporate tax rate being slashed from 35% to 21%. In an effort to be fair to businesses operating in pass-through entities like partnerships, S-Corporations and trusts, there is a new maximum 20% deduction of qualified business income. Much has been written about this deduction and this article simply cannot cover all of the rules, details and regulations that have been issued since the tax reform went into effect. If you have qualified business income of $100,000, this deduction could be as high as $20,000. This is an annual deduction that is set to expire after 2025. This means that you could qualify for this $20,000 Qualified Business Deduction each year until 2025. A small amount of planning in this area could be valuable to you!
It is my hope that this article provided a refresher to the changes in your tax return from 2017 to 2018. The new law is complex, and although the recent media coverage has stated that the reform was a net negative for taxpayers, I believe we still have a lot of planning opportunities to consider. I trust that my fellow tax and financial advisors will agree!
Donovan Thiessen, CPA is The Accountant. He is a small business owner in Las Vegas focusing on individual and business income taxation, and quality accounting. You may reach Donovan at email@example.com and 702-786-0272.