By Devon Lehmkuhl
Duck season! Rabbit season! Deer season! Holiday season! Tax season?! For a tax accountant, after the holiday season, tax season starts. Tax season describes the over 3 months from January 2 through April 15 in which most tax preparers kiss their spouse and children goodbye and tell them, “See ya’ on April 16!”
Right before the holidays, the Internal Revenue Service received a pretty substantial order: rework all your tax forms and publications to accommodate the new tax laws starting on January 1, 2018. I’m not sure if that is a Christmas gift to the Internal Revenue System (IRS), but it is job security for them for the foreseeable future. Indeed, it will take them time to fully digest and design the forms to accommodate the changes. And like them, all taxpayers now have to determine how these laws affect them.
Here is what we do know, this tax law is a pretty major change; the biggest one since 1986. To put into perspective how long ago that is, in 1986, we had yet to do the Macarena, wear baggy pants like MC Hammer, Bust a Move with Young MC, or try to dance to Ice-Ice Baby with a Baby that Got Back. So, it’s been a few holidays since we got a tax law change like this.
Here is a brief synopsis of the changes. For individuals, there are at least 13 major tax law changes. I will highlight just a few; this article should not take the place of talking to your tax advisor to make sure you understand how these changes directly affect your pocketbook.
There are new tax rates starting 2018, the highest now caps at 37 percent. Individuals pay taxes via a tiered system. This means as the income increases, the higher portions of the income are subject to higher tax. The old tiered tax law (which is in effect for 2017) goes as follows: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. The new tiered system will go from 10 percent to 12 percent to 22 percent to 24 percent, 32 percent and 37 percent. The law also increases the amount of income needed to graduate into a higher tax rate. Overall, these changes should be realized by most taxpayers. However, you may not experience significantly lower taxes, as other changes come in to play.
Next, good bye personal exemptions. Each of the previous years, most taxpayers have been able to deduct approximately $4000 per person on their tax return. For a family of 4, that’s a $16,000 deduction from their taxable income. To help counter this loss, the tax law calls for the standard deduction to basically double. A single taxpayer will now have a $12,000 standard deduction, a married couple will get a $24,000 deduction. Head of Household, elderly and blind, like under the old law, will get an additional amount for their standard deduction, too. These are tax deductions, not credits. The difference between a deduction and a credit is this: a deduction reduces taxpayer taxable income and a credit reduces taxpayer tax liability. So, a deduction reduces the amount of income on which the tax is figured, and a credit directly subtracts from the amount of tax.
Child Tax Credit, which under the old law capped at $1000, now will be $2,000 per qualified child, of which $1,400 is refundable if the credit exceeds your tax. For dependents over age 16, now called “non-child dependents” the new law creates a $500 nonrefundable tax credit. This part also is intended to help offset the loss of the personal exemptions mentioned above.
The next major change is regarding health insurance and the Affordable Care Act (ACA). ACA is famous for implementing what is now commonly referred to as Obamacare. The new law repeals the mandate for individuals having to purchase health insurance starting on January 1, 2019. Under the current law, all individuals must purchase minimal essential health coverage or pay a penalty to the IRS. This repeal means one will not owe the IRS anything if they elect to forego health insurance. This takes a big bite out of the Obamacare law, as it takes away its major enforcement provision.
Let’s talk about SALT. Too much salt is bad for our health, and now our SALT has been limited on our taxes. SALT stands for State And Local Taxes, aka Illinois income tax paid and local property taxes. Many home owners have deducted these taxes when we itemize our deductions on our taxes. With Illinois income tax now at 4.95 percent and property taxes a substantial chunk of change, these amounts combined can exceed over $10,000 per year. The new law limits taxpayers to deducting only $10,000 of this expense. With the doubling of the standard deduction and limiting our SALT, a lot of taxpayers who previously itemized their deductions will now be taking the standard deduction. This means many of you will not get any extra bang for your buck for paying these additional taxes, as in previous years. This new law is the reason why many rushed to pre-pay local property taxes in 2017 to get one last benefit from their SALT. However, the IRS recently came out and said they would not allow the deductions for the prepayments unless the tax had been assessed in 2017. Look for potential litigation as many across the nation fall in to this category.
On the business side of the tax changes, many new laws also go into effect. The main ones affect the tax rates, pass-through entities and depreciation. Businesses will be permitted to write off a higher amount of capital purchases, creating tax savings in the year the assets were purchased instead of taking a portion of the cost over several years. The corporate rate is now a flat 21 percent, changing from a tiered system that bounces around between 34 percent and 39 percent. Additionally, pass-through entities, like partnerships, S corporations, limited liability companies, and sole proprietorships get a 20 percent deduction on earnings, potentially, based on special rules.
Overall, the tax “game” has changed a little for everybody in 2018. This brief article is to simply make you aware of the changes. If you have questions, I encourage you to browse around for more information, talk to a professional, or both. I wish you all a Happy Tax Season!