2018 Tax Reform: Key Changes
Hello everyone,
We thought you might want a break from hearing us talk about finance, so we thought we’d change it up a bit with this newsletter and talk about something even more exciting – taxes!
Quite a few things are changing with the new tax reform law, so we wanted to synthesize and highlight what’s staying the same, what’s changing, and how it may impact you (and your taxes) in 2018 and beyond.
This information is intended to serve as a reference and guide to the new tax laws. It is not intended to be used as tax advice or as a definitive source. Please feel free to get in touch with us if you have any questions, but your CPA will be your best resource for specific questions pertaining to your personal circumstances.
ORDINARY INCOME TAX RATES
The Tax Cuts and Jobs Act (TCJA) maintains seven individual income tax brackets. The chart below provides a comparison of income tax rates in 2017 and 2018-2025 (as these rates are set to expire after 2025).
*Under the act, the income thresholds for the individual tax brackets will be adjusted for inflation using the Chained Consumer Price Index for All Urban Consumers. This is a permanent change.
For those of you who don’t love spreadsheets, here’s a visual comparison:
Ordinary Income Tax Rates: 2017 to 2018-2025 Comparison
Source: https://www.congress.gov/bill/115th-congress/house-bill/1/text
CAPITAL GAINS
Short-term capital gains are still taxed as ordinary income, so updated income tax rates above still apply.
For long-term capital gains and qualified dividends, the new tax law retains the 0%, 15%, and 20% rates. However, for 2018-2025, these rates have their own brackets that are no longer tied to ordinary income brackets. After 2018, these brackets will be indexed for inflation. For 2018, qualified dividends will face the following tax rates:
SELF-EMPLOYMENT TAX
Below are the taxes on self-employment income up to $128,700 for 2018. Once self-employment taxes are calculated, half of that amount is deductible when calculating overall AGI for that year.
RETIREMENT PLAN CONTRIBUTIONS
The maximum contribution to an employer-sponsored retirement plan (such as a 401(k)) increased from $18,000 in 2017 to $18,500 in 2018.
ROTH IRA CONTRIBUTIONS & LIMITS
The maximum annual contributions to Roth IRAs are staying the same in 2018 ($5,500 for those under age 50; $6,500 for those 50 and older). The income limitations for Roth IRA contributions have increased slightly, and begin to be phased out when adjusted gross income (AGI) reaches $189,000 for joint filers and $120,000 for single filers.
ITEMIZED DEDUCTIONS
The enacted bill substantially increases the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly. Increased standard deductions will allow many individuals to avoid itemizing their deductions.
MORTGAGE INTEREST DEDUCTION
The mortgage interest deduction will be limited to interest on $750,000 ($375,000 for married filing separate taxpayers) of acquisition indebtedness on a taxpayer’s primary and secondary residences. Mortgages existing on or before December 15, 2017 are grandfathered under the prior-law $1 million threshold. The interest deduction for home equity indebtedness is repealed.
STATE AND LOCAL TAX
State and local income, sales and property tax deductions are limited to an itemized deduction of up to $10,000 ($5,000 for married taxpayers filing a separate return).
Below is an infographic showing state income tax levels across the country.
PERSONAL EXEMPTION
The deduction for personal exemptions is repealed.
CHILD TAX CREDIT
The child tax credit increases to $2,000 per qualifying child (double the amount under previous law). Of this amount, $1,400 per qualifying child will be refundable. The credit begins to phase out for married filing joint taxpayers with adjusted gross income in excess of $400,000. In addition to the credit for qualifying children, a $500 nonrefundable credit is available for qualifying dependents other than children.
