Tax day is quickly approaching, and if you’re like most Americans, you’re wondering how the latest tax law changes will affect your filing this year. In truth, these are some of the most significant tax revisions we’ve seen in years, and they impact nearly every taxpayer in one way or another. Unfortunately, many people are still unclear on the exact changes made and which specifics they need to pay attention to this year, so we’re hoping to clear that up with this article. Let’s take a look at four notable revisions from the latest tax law changes.
1. New Tax Rates
The latest tax reform brought about a revision to the tax brackets that created new income thresholds as well as new tax rates, while still keeping the same total of seven different tax brackets as illustrated below. It’s important to note here, however, that the tax code is progressive. Your marginal tax rate is only the highest tax rate you reach, not what pay on every dollar earned.
For example, if you make $220,000 per year (32% marginal tax rate), you pay 10% on the first $9,525 you earn, 12% on the next $29,175 of income ($9,525 to $38,700), 22% on the next $43,800 of income ($82,500 to $157,500) and so forth. Many people are unaware of this detail.
2. New Deductions and Credits
Easily the most notable revision that occurred in the latest tax law changes involved a sizable increase in the standard deduction. Valid from tax years 2018 through 2025, the new tax code equates to a $12,000 standard deduction for single filers and $24,000 for married couples filing jointly, nearly doubling what it was in 2017, but it eliminates the $4,050 personal exemption (see table below). Also, many sweeping changes occurred to available itemized deductions and tax credits.
The elimination of certain deductions (e.g., investment fees above 2% AGI) coupled with this now higher standard deduction may mean a larger tax bill this year for those who would otherwise itemize their deductions but no longer can. This larger tax bill situation could also be true if you did not update your W-4 for paycheck withholding when the new form came out. Old W-4’s reflect the old, lower standard deduction which means your current withholding could be wrong. Make sure you update your W-4 to avoid any penalties or interest.
3. Alternative Minimum Tax
The latest tax law changes also overhauled the Alternative Minimum Tax (AMT) system and reduce the number of people using the system. Before 2018, about 5 million taxpayers were expected to pay the AMT under the old laws, but this year, only around 200,000 are expected to pay under the new rules.
The AMT was enacted in 1969 and was designed to be a supplemental income tax to ensure high-income earners paid their fair share of taxes, no matter how many deductions were legally available under the current tax rules. Income thresholds were then established to coincide with the taxpayer’s filing status. The action prevented taxpayers from taking advantage of exemptions in an attempt to amplify tax reductions and avoid paying taxes.
Today, taxpayers calculate alternative minimum taxable income (AMTI) based on qualifying deductions. For 2018, the exemptions are up to $16,000 from 2017 for singles or heads of household, $24,900 for married filing jointly, and $12,450 for married filing separately:
- $70,300 for single or heads of household
- $109,400 for married filing jointly
- $54,700 for married filing separately
More significant changes appear in the 2018 AMT phase-out income thresholds. Exemptions are reduced by one dollar for every four dollars of AMTI above the phase-out thresholds.
- $500,000 single, heads of household or married filing separately (from $120,700).
- $1,000,000 for married filing jointly (from $160,900).
4. Business Owners
New rules apply to all businesses now, including C corporations, pass-through entities, and sole proprietorships. Even though the new business tax codes come with restrictions and a list of exceptions, most are beneficial and a welcomed change for business owners, including:
- A reduction from 35% to 21% for C Corporations, which should help improve the bottom line.
- Business property and equipment (deductions) receive an expense cost increase doubled from $500,000 in 2017 to $1 million in 2018.
- Bonus depreciation for property, building, and equipment is now 100 percent for five years, up from the previous 50 percent.
- Pass-through businesses receive a tax break with a 20 percent deduction on qualifying business income. However, there are restrictions and phase-out limitations for certain types of service businesses.
- Limitations on interest deductions for businesses averaging gross receipts of more than $25 million over three prior years.
The Bottom Line
The sweeping revisions from the latest tax law changes mean it may be time for a new tax strategy. Modifications to personal, business and corporate deductions have new limitations imposed and may not be as beneficial as they were in the past. Pre-planning and meeting with a financial professional may illuminate your situation more clearly and provide you with a new tax perspective. Schedule your initial consultation with us today to see how we can help.
Forefront Wealth Partners is an independent financial advisory firm that provides creative problem solving to our clients. In a world where change is accelerating and the future uncertain, we provide simplicity and confidence concerning financial, tax, and legal strategies. Our process involves a deep relationship, focusing on meaningful outcomes and dynamic planning.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP’s express prior written consent.
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