The final tax legislation passed by Congress and signed into law in December 2017 modified the tax code. Following is a summary of various changes for 2018 and beyond, including changes to individual income tax rates, standard and itemized deductions, estate tax exemptions and the expansion of qualified expenses for 529 plan funds as well as various business tax changes. Some of these changes are set to expire after 2025. However, nothing is permanent when it comes to the tax code. For more information on these tax changes, please consult a tax professional.

 

IMPORTANT: Note that because these changes take effect beginning in calendar year 2018, they do not apply to tax returns filed for 2017 taxes.

 

Individual Income Tax Rates

Five of the seven tax brackets for ordinary income were adjusted and/or expanded, including the top rate from 39.6 percent to 37 percent.

The alternative minimum tax (AMT) exemption amount increased and the income phaseout thresholds increased considerably. These changes combined with limitations on itemized deductions mean that far fewer people will be subject to AMT going forward.

NEW:    37% (top bracket)

PRIOR: 39.6% (top bracket)

 

Standard and Itemized Deductions

There was a substantial increase in the standard deduction. This may make it difficult for some people to itemize and may change how people make charitable contributions. Alternatives that may make sense now include setting up a charitable gift fund, making gifts directly from required minimum distributions for those over age 70 or making larger gifts every other year instead of annually. Personal exemptions were eliminated.

Within itemized deductions, the state and local tax deduction is limited to $10,000 annually. This includes state income taxes as well as property taxes.

All miscellaneous itemized deductions previously subject to the adjusted gross income (AGI) floor of 2 percent are suspended from 2018 through 2025. Medical expense deductions are limited to those that exceed 7.5 percent of AGI for 2017 and 2018. The threshold reverts to 10 percent of AGI in 2019.

Standard Deduction

NEW:  $12,000 (single) | $18,000 (head of household) | $24,000 (married filing jointly)

PRIOR:  $6,500 (single) | $9,550 (head of household) | $13,000 (married filing jointly)

 

Child Tax Credit

The child tax credit increased to $2,000 per child with the phaseout increasing considerably to $400,000 for married filing jointly and $200,000 for single filers.

NEW:    $2,000

PRIOR:  $1,000

 

529 Plan Changes Expand Use of Distributions

Previously, money saved in a 529 college savings plan could only be used to pay for higher education expenses. The changes made to 529 college savings plans expand the use of qualified tax-free distributions to include expenses for private elementary and secondary school.

Please note that the ability to use 529 plans for non college expenses depends on the state plan involved. Please check your plan to see what is allowed.

NEW:    $10,000 (can be used for elementary and secondary school expenses)

PRIOR:  $0

 

Estate Tax Exemptions

The federal estate tax exemption was not eliminated, but it was doubled to $11.2 million per person. The exemption increases with inflation. For estates over this amount, federal estate tax is 40 percent. Estate tax may still apply at the state level. Note that step up in basis for assets owned at death remains intact as does portability of the exemption between spouses. This increase is currently scheduled to expire on December 31, 2025.

2018:  $11.2 million

2017:  $5.6 million (adjusted for inflation)

 

Gifting

While the annual gift tax exclusion for 2018 is $15,000, this amount is per recipient. Additionally, individuals can gift up to the amount of their estate exemption during their lifetime before January 1, 2026.

NEW:    $15,000 annually

PRIOR: $14,000 annually

 

Summary of Various Business Tax Changes

Corporate tax rates changed from a maximum of 35 percent to a flat 21 percent. Bonus depreciation will be gradually decreased while the Section 179 deduction will be increased. Additionally, a 20 percent deduction of qualified business income from certain pass-through entities has been established. Specific service industries are excluded if individual taxable income is over certain limits.

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The content of this article should not be construed as legal or tax advice. Although great effort has been taken to provide accurate numbers and explanations, this information should not be relied upon for making investment decisions. Always consult a tax professional regarding your specific tax situation.