The 2018 tax reform legislation passed by Congress in late 2017 significantly changes the landscape for individuals for the coming years. For many taxpayers, the changes made by the legislation present a host of tax planning challenges and opportunities going forward. Due to the elimination or limitation on itemized deductions, and the elimination of personal exemptions, a key consideration in planning for 2018 is to first look at ways to lower your taxable income. You should thus consider maximizing all pre-tax contribution opportunities such as your 401(k) and maximizing deductible IRA contributions.
Despite the headlines, it will remain important for you to keep track of your medical expenses, mortgage interest, property and state income or sales tax payments and charitable contributions made during 2018 due to new restrictions on itemized deductions.
Highlighted below are the most significant changes made by the reform legislation and possible challenges and opportunities to lower your tax bill for 2018 and beyond.
Lower Individual Tax Rates
The legislation creates lower individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate from 39.6% to 37%, respectively. See below for the 2017 tax brackets compared to the proposed 2018 tax brackets for taxpayers Married Filing Joint.
|2017 Tax Rate Schedule||Proposed 2018 Tax Rate Schedule|
|Married Filing Jointly & Surviving Spouses:||Married Filing Jointly & Surviving Spouses:|
|10% (< $18,650)||10% (Taxable income < $19,050)|
|15% (> $18,650 < $75,900)||12% (>$19,050 <$77,400)|
|25% (> $75,900 < $153,100)||22% (>$77,400< $165,000)|
|28% (> $153,100 < $233,350)||24% (> $165,000 < $315,000)|
|33% (> $233,350 < $416,700)||32% (> $315,000 < $400,000)|
|35% (> $416,700 < $470,700)||35% (> $400,000 < $600,000)|
|39.6% (> $470,700)||37% (> $600,000)|
Increase in the Standard Deduction
In 2018, the standard deduction increases significantly from $12,700 to $24,000 for joint filers, from $9,350 to $18,000 for heads of households, and from $6,350 to $12,000 for singles. Since you can claim the higher of the standard deduction or itemized deductions, you will want to closely compare the two methods as you may now benefit from a higher standard deduction given the many changes to itemized deductions.
$10,000 Cap on State and Local Tax Deduction
In a significant departure from prior law, the legislation will allow individuals to deduct no more than $10,000 of any combination of the following taxes – state and local income taxes, state and local property taxes, and sales taxes.
If you have questions regarding the tax reform beginning in 2018, please email us or give us a call at 703-836-1350.