The Tax Cuts & Jobs Act signed into law on December 22, 2017 by President Donald Trump has widespread changes affecting your personal taxes and estate planning. While this law significantly impacts business taxes too, this article primarily reviews the impact of the tax law on your personal finances. It’s vital to be aware of and plan for these changes during 2018. The following summary explains the most critical changes that affect how much tax you’ll owe the IRS.

What Has Changed?
Tax brackets: The seven current marginal tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) are replaced with seven corresponding brackets at lower rates (10%, 12%, 22%, 24%, 32%, 35% and 37%).

Your paychecks: You’ve likely noticed a change in your federal withholdings starting February 2018, as the IRS updated withholding tables during January 2018.

Your K-1: Most business owners receiving a K-1 will be able to deduct 20 percent of that pass-through income tax-free. There are income and service field limitations.

Your estate plan: The federal estate tax exemption doubled to approximately $11.2 million. It’s a good time to review your estate plan with your CPA, advisor and attorney. The strategies surrounding the use of trusts will be impacted by this change.

The standard deduction: The standard deduction is nearly doubling to $12,000 (single), $18,000 (head of household) and $24,000 (married filing jointly). Far fewer taxpayers will itemize deductions.

Itemizing deductions: If you do still itemize deductions on Schedule A, note the following:

• The deduction for state and local income and property taxes is limited to $10,000.
• The mortgage interest deduction is limited to interest on $750,000 of qualified mortgage debt. Mortgage debt acquired prior to 2018 is grandfathered at the $1 million indebtedness limitation. No interest will be deductible on home equity loans.
• The Adjusted Gross Income (AGI) limitation for deducting medical expenses is changed to 7.5 percent for all taxpayers for 2017 (retroactively) and 2018; it then returns to 10 percent in 2019.
• The AGI limit for deducting charitable gifts increases from 50 percent to 60 percent.
• Generally, no casualty and theft losses are deductible, except for those suffered in a federal disaster area.
• Miscellaneous itemized deductions subject to the two-percent AGI floor are no longer deductible.

Personal exemptions: These exemptions are repealed. You’ll no longer deduct $4,050 per dependent on your tax return. Large families could be more noticeably impacted.

Child tax credit: The credit doubles from $1,000 to $2,000 per child, and the AGI phase-out increased significantly. The refundable portion of this credit is $1,400 per child. Furthermore, a non-refundable credit of $500 is available for certain other qualifying dependents (such as children claimed on your tax return over the age of 16). The higher credit will help offset the negative impact of losing personal exemptions for many families.

Corporate income taxes: The top corporate income tax rate will fall from 35 percent to 21 percent. There are other business tax impacts not discussed here.

Alternative Minimum Tax (AMT): The AMT exemption amounts and phaseout thresholds are increased notably, such that fewer taxpayers will be subject to AMT.

Health insurance mandate: Effective January 1, 2019, this mandate is scheduled to be repealed and you will no longer face a penalty for not having minimum essential health coverage.

Alimony: Effective January 1, 2019, taxpayers who divorce will not deduct alimony payments from taxable income, nor will alimony received be reported as income. This applies only to divorce or separation agreements executed after December 31, 2018, or to agreements in place prior to this date if they have been modified to state the new provision applies.

Key Items to Note
This tax bill is expected to cut $1.5 trillion of taxes over the next 10 years, approximating a 3.5-percent federal tax cut. Fifty-six percent of this tax cut is expected to go to individuals, with the remaining 44 percent going to businesses. Most of these provisions could expire after 2025; however, the decreased corporate tax rate is permanent.

You’ll notice there are impacts going both directions on taxpayers (increasing and decreasing taxable income), making it more important that you understand how this will impact you personally.

Remember to file your tax returns in a timely fashion, in light of the Equifax breach. If someone stole your identity, they may attempt filing a return in your name to claim your refund fraudulently.

Each person’s tax situation is unique. 2018 is a good year to review your tax plan with your CPA. iBi

Philip Schmidt, CPA, PFS, is Vice President of Finance & Operations with Witzig Financial Strategies in Morton, Illinois. He can be reached at (309) 282-6403 or pschmidt@cirmail.biz. Investment Advisor Representative; Cambridge Investment Research Advisors, Inc., A Registered Investment Advisor; Cambridge and Witzig Financial Strategies are not affiliated.