Submitted by Boal & Associates

The 2018 tax year is quickly coming to an end and we would encourage all taxpayers to use the next few months to reach out to their tax preparer to review your situation to ensure that you are taking advantage of all of the opportunities that exist for 2018 and to further ensure that your withholding and estimated tax payments have been properly adjusted to account for the new 2018 tax reform.   The most recent tax reform act has been one of the largest in history, so it is important to be sure that your tax posture is in proper order going in to the end of the year.

On of the first items to address is that there is a lot of fraud going on right now with phone calls and emails from folks acting as if they are the IRS.  Please be aware that the IRS will NOT call or email you, they will contact you by way of mail, but they will never contact you by phone or email. 

We have summarized below a few of the major highlights of the new reform:

New Tax Rates and Brackets

There are seven new tax rate brackets for individuals 10%, 12%, 22%, 24%, 32%, 35% and 37%, all of which have been expanded to include more income at lower rates.  Most everyone will see a reduction in their overall income tax rate.  The favorable capital gain rates remain unchanged – 15% AND 20%.   The 3.8% Medicare Surtax on net investment income continues to exist.

Standard Deduction Increase

The standard deduction has been increased to $24,000 for Married Filing Joint, $18,000 for Head of Household and $12,000 for Single taxpayers.  Many folks that have been traditionally itemizing their deductions will be able to utilize this enhanced standard deduction.

Qualified Residential Mortgage Interest

Interest is now deductible on new acquisition debt on a primary or second residence on mortgages up to $750,000, down from $1,000,000.  The new limit generally applies to mortgage debt incurred after December 14, 2017. There is no longer a write-off for interest on home equity indebtedness after 2017 with certain exceptions.  Also, margin interest remains deductible as investment interest expense.

State and Local Income Taxes and Property Taxes

The deduction for state and local income taxes and property taxes is now capped at an aggregate amount of $10,000.  This will affect a lot of people in high income tax states and those with higher property taxes.

Sale of Principal Residence

The rule still applies that in order to exclude a gain on the sale of your principal residence you must have lived in the home at least 2 of the last 5 years.

Miscellaneous Itemized Deductions

The following deductions have been eliminated:  Moving expenses (except military), employee business expenses, brokerage and IRA fees, hobby expenses, tax preparation costs, theft losses, alimony for post-2018 divorce decrees, and personal casualty losses (unless in a presidentially declared disaster area).

Medical Expenses

Medical expenses remain deductible and are now subject to a 7.5% threshold instead of 10% for 2018.

Child Tax Credit Increased

The child tax credit is increased to $2,000 and the income phase-out limits have been increased to $400,000 for a married filing joint couple and $200,000 for all other taxpayers.  More folks will now be able to utilize the favorable child tax credit.

Health Insurance Mandate

The mandate for paying a fine if you don’t have qualified health insurance is repealed for years after 2018.  The mandate continues to apply for 2018.

BUSINESS TAX REFORM

Corporate Income Tax Rates 

Regular (“C Corporations”) will now pay a flat tax rate of 21%, much lower than the previous highest rate of 35%.  There is no longer a corporate AMT.

Pass-through Deduction

Sole proprietors, S Corporation shareholders and LLC members will now receive a 20% qualified business income deduction.  The break does phase-out for folks in professional service fields such as law, consulting, accounting and healthcare on income in excess of $315,000 for joint returns and $157,500 for single returns.  – realtors/brokers may be considered part of the professional service field -service is based on reputation.

Bonus Depreciation and Section 179 Expense

Bonus depreciation has been increased to 100% of the cost of the asset (in place of the previous 50%).  The final bill increases the amount of qualified property eligible for immediate expensing from $500K to $1 million per year under Section 179.  The bill also added the following items as eligible for this election:  Roofs, heating, ventilation and air-conditioning property and security systems.  This will allow for many assets to be written off immediately – keep in mind that Maryland has decoupled with this law.

Business Deductions Eliminated

The bill eliminated or reduced deductions for business entertainment, country club dues, the domestic production deduction and personal property like-kind exchanges.

This is just a broad-brush of the recent changes, we again encourage you to reach out sooner rather than later to your tax preparer to understand your tax posture for 2018.  Remember, January is usually too late to make changes.   If you have questions, please feel free to reach out to us at (301) 334-4007 – we are glad to assist you.