Understanding the new tax laws for 2018

The recent tax law changes are a hot topic in media coverage. You’re probably paying attention to the news and scratching your head as you ask: “what does this mean for me?” For some, the tax changes may be relatively small. For others, the changes could be substantial. Here’s the scoop on what you need to know.

Tax rates are changing; many individuals and businesses will pay less.

Though there are still seven tax brackets for individual taxpayers, many will find that they are in a lower tax bracket under the new system.

• The new individual rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37% (effective Jan. 1, 2018 through Dec. 31, 2025).
• The individual tax rates under the prior law were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Plus, the income limits changed, resulting in many taxpayers being pushed to a lower bracket than before.

Though not everyone will pay less taxes under the new rules, here are a few examples of individual taxpayers who will pay less federal taxes in 2018:

• A married couple who filed a joint return with taxable income of $150,000 in 2017 was in the 25% tax bracket; for 2018, this couple will be in the 22% tax bracket — if you do the math, this couple will save approximately $4,000 in taxes in 2018.
• A single taxpayer with taxable income of $60,000 in 2017 was in the 25% bracket; for 2018, this taxpayer is in the 22% tax bracket — if you do the math, this taxpayer will save approximately $1,600 in taxes in 2018.

There are also changes to the corporate tax rates and a new deduction for individuals who have “qualified business income” or QBI from a partnership, S corporation or sole proprietorship.

• The new corporate tax rate is a flat 21% (prior-law graduated corporate rates were 15%, 25%, 34% and 35%). This rate isn’t set to expire.
• There is a deduction of up to 20% for QBI (this deduction is set to expire Dec. 31, 2025).

Many individual returns will be easier to complete.

One of the many goals associated with tax reform is to make it easier for taxpayers to complete and file accurate returns.

The new law increased the standard deduction through 2025 and did away with personal exemptions. What does this mean? For many individual taxpayers, it may mean fewer forms and calculations to complete. More taxpayers will use the standard deduction and avoid the need to itemize their expenses (while avoiding the requirement to file a Schedule A and keeping detailed records of those expenses). Several studies have estimated that of the roughly 45 million taxpayers who itemized their expenses on their 2017 returns, only between five and eight million will itemize in 2018.

Good news for people who have young children.

The child tax credit may be claimed for qualifying children under the age of 17.

Starting in 2018, more people will qualify for this credit, and it’s even bigger — double actually. For 2018, the child tax credit is doubled from $1,000 to $2,000 per qualifying child. Plus, the threshold at which the credit begins to phase out is increased to $400,000 for married taxpayers filing a joint return and $200,000 for other taxpayers.

No penalty imposed on individuals who do not have health insurance.

The new law reduces the individual shared responsibility penalty to zero for tax years starting Jan. 1, 2019. However, note that the penalty is still in effect for the 2018 calendar year, and even when the penalty goes away, other aspects of the Affordable Care Act are still in place.

Even when there is no penalty associated with not having health insurance, you should consider the financial implications of being uninsured.

Other noteworthy tax changes.

• Individuals may still be subject to alternative minimum tax (AMT); however, the AMT exemption amount was increased (so fewer people will be hit with this tax). Corporate AMT is repealed.
• 529 plans can now be used to pay for public, private or religious elementary and secondary schools. This can be a nice tax benefit for families who choose to put their children in private schools.
• The new law suspends all previous miscellaneous itemized deductions for individual taxpayers (that were subject to the 2% of adjusted gross income limitation).
• There is an overall deduction limit of $10,000 for property and state and local income taxes for individual taxpayers. Plus, with the increased standard deduction, many taxpayers will no longer itemize their expenses (on Schedule A). Therefore, many taxpayers will not receive any benefit for certain expenses, such as state and local taxes.

Other provisions in tax reform will have varying levels of effects on taxpayers. Plus, many provisions are set to expire in a few years, and there is uncertainty about what will happen at that time.

With so many moving parts and considerations, talk to your Certified Public Accountant (CPA) to see how the tax law changes may impact you specifically. Visit the 360 degrees of financial literacy website to learn about the benefits of choosing a CPA for all of your tax needs and to find a CPA in your area.

Susan C. Allen, CPA, CITP, CGMA, is Senior Manager in the AICPA's Tax Division. Reprinted with permission of the AICPA.