2018 Personal Tax Guide
Introduction: 2018 is a Year of Change
In 2017, we were subject to the tax regime resulting from the American Taxpayer Relief Act of 2012 (“ATRA”): The top federal ordinary income tax rate was at 39.6%, the top federal long-term capital gains tax was at 20% and the top alternative minimum tax rate was at 28%. The top estate and gift tax rate was at 40% and a $5.49 million gift, estate and generation-skipping tax exclusion was in effect.
In addition, the enactment of the Protecting Americans from Tax Hikes Act of 2015 (“PATH”) extended many of the tax incentives and credits for individuals and businesses—some on a permanent basis. The Patient Protection and Affordable Care Act (“ACA”) continued to impose a 0.9% Health Insurance Tax on earned income for higher income individuals and a 3.8% Medicare Contribution Tax on net investment income. The tax is imposed on the lesser of (a) net investment income (interest income, dividends, capital gains and passive income less expenses directly attributable to the production of such income and (b) the excess of modified adjusted gross income over a specified dollar amount ($250,000 for joint filers or a surviving spouse, $125,000 for married filing separately and $300,000 for other taxpayers).
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Act”) was signed into law by President Trump. The Act is the most significant piece of tax legislation since the Tax Reform Act of 1986, more than 30 years ago. The Act has broad impact on all aspects of the American economy and will impact businesses and individuals alike. It also has a substantial impact on multinationals and international transactions. The Act even impacts not-for-profit organizations. Most of the provisions are effective for tax years beginning after December 31, 2017. Some of the provisions expire after December 31, 2025.
Some of the major provisions are as follows:
- The top individual tax rate is at 37%, down from 39.6% in 2017. The top long-term capital gains tax remains at 20% and there is no change to the 3.8% Medicare Contribution Tax on net investment income, nor the 0.9% Health Insurance Tax on earned income for higher income individuals.
- The top rate of 28% for alternative minimum tax for individuals remains the same.
- For individuals, the standard deduction almost doubles, while itemized deductions are either limited or eliminated. State/local and property tax deductions are eliminated, except for $10,000 for tax years beginning after December 31, 2017 and ending before January 1, 2026. All miscellaneous itemized deductions that are subject to the 2% AGI limit are repealed for tax years 2018-2025. Home mortgage interest expense is limited to interest on acquisition debt for tax years 2018-2025, with the maximum amount that may be treated as acquisition debt reduced to $750,000 (from $1 million) and applied to any acquisition debt incurred after December 15, 2017. The $1 million threshold is reinstated starting in 2026. Interest paid on home equity debt of any qualified residence is not deductible except for loans used to buy, build or substantially improve the taxpayer’s home that secures the loan.
- Charitable deductions remain a viable itemized deduction. The Act increases the percentage of an individual’s AGI limitation that may be deducted for cash contributions to public charities and other certain other tax-exempt organizations (such as a donor advised fund) to 60%, which is up from 50%. As the law is currently written, the 60% threshold applies only to cash contributions. Because of the increase in the standard deduction and the scaling back of the itemized deductions, many individuals will not be itemizing on their tax returns starting in 2018. The Urban-Brookings Tax Policy Center believes that the number of taxpayers filing returns claiming deductions for charitable contributions will drop from about 37 million to about 16 million in 2018. This is an issue that is concerning many exempt organizations, as there is now a disincentive to making charitable contributions.
- The Act increases the estate, gift and generation-skipping transfer tax exclusions from $5 million to $10 million, indexed for inflation. The inflation adjusted exclusion for 2018 is $11.18 million per person, or $22.36 million per married couple. The top estate and gift tax rate remains at 40%.
- The top tax rate for C corporations is now 21%, a decrease from 35% in 2017.
- There is a new qualified business income deduction of up to 20% for pass-through entities, such as partnerships, limited liability companies, S corporations and sole proprietors. The deduction is generally limited to the greater of (1) 50% of W-2 wages paid by the business or (2) the sum of 25% of the W-2 wages paid plus 2.5% of the unadjusted basis of certain property the business uses to produce qualified business income. Certain other limitations apply.
- The alternative minimum tax for corporations has been permanently repealed for tax years beginning after December 31, 2017.
On February 9, 2018, President Trump signed the Bipartisan Budget Act of 2018 (also known as the Honoring Hometown Heroes Act). The bill is the third in a series that increased spending caps originally imposed by the Budget Control Act of 2011; the first two were the Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015. This Act funds the government for two years and features some of the largest increases in government ever. Here are some of the highlights:
- Spending limits will be raised by about $300 billion over the next two years.
- Defense spending will be raised by $80 billion in the current fiscal year and $85 billion next year.
- Domestic spending will increase by $63 billion this year and $68 billion next year.
- The debt limit will be suspended through March 2019, putting the next vote on this issue past the 2018 midterm elections.
- $20 billion has been designated for infrastructure programs such as surface transportation, rural water and wastewater systems.
- $6 billion has been designated to fight the opioid crisis.
- $4 billion has been designated for college affordability programs for teachers, firefighters and police officers.
- $90 billion has been designated for disaster aid for Texas, Florida and Puerto Rico.
- There are no funds designated for President Trump’s proposed southern border wall.
- There is no legislation addressing Deferred Action for Childhood Arrivals (“DACA”).
- This Act extends some expiring tax provisions, offering some tax relief for families and individuals, including extension of mortgage insurance premiums treated as qualified residence interest, above-the-line deduction for qualified tuition and related expenses and credits for certain energy production and conservation.
- This Act repeals Obamacare’s Independent Payment Advisory Board, which was designed to limit Medicare costs.
- This Act extends the Children’s Health Insurance Program for ten years.
We have included in our tax guide details on both of these acts and how they might impact your tax situation.
The international arena continues to be of great concern to many individuals and families. The global threat of terrorism, the investigation of Russia over interference with U.S. election proceedings, the continued tension between the U.S. and North Korea, and potential trade wars that may result from the U.S. imposing tariffs on steel and aluminum imports continue to be significant issues.
Many families with wealth are very concerned about their children’s and grandchildren’s future, and wonder what can be done to sustain and grow their wealth in these uncertain times. Given the impact of new legislation and the current economic and geopolitical conditions, it is extremely important that you pay attention to your financial position so that you can achieve your financial objectives. Specific goals such as retirement planning, managing cash flow, financing the cost of your children’s college education and transferring your family’s wealth to the next generation should be top-of-mind in 2018 and beyond.
We have written this guide to provide you with a tool to identify opportunities to minimize tax exposure, accomplish your financial goals and preserve your family’s wealth. This guide includes all major law changes through March 15, 2018. The best way to use this guide is to identify areas that may be most pertinent to your unique situation and then discuss the matter with your tax advisor. It is especially important that you check in with your tax advisor before proceeding with any tax planning transactions this year. Because the Tax Cuts and Jobs Act was hastily enacted at the end of 2017, we are seeing many areas of the law where further guidance from the IRS or even a Technical Corrections Act are needed to clarify the application of the law. As always, our tax professionals will be pleased to discuss any of the ideas in this guide or any other planning opportunities which might apply to your personal situation.
|2018 Personal Tax Guide complete download [Adobe PDF file]|
|chapter||Table of Contents– download by chapter|
|1||Tax Planning Strategies|
|2||Tax Rate Overview|
|3||Estimated Tax Requirements|
|4||Alternative Minimum Tax|
|5||Business Owner Issues and Depreciation Deductions|
|6||Capital Gains and Dividend Income|
|7||Stock Options, Restricted Stock and Deferred Compensation|
|8||Small Business Stock|
|9||Passive and Real Estate Activities|
|10||Principal Residence Sale and Rental|
|14||Estate and Gift Tax Planning|
|17||International Tax Planning and Reporting Requirements|
|18||State Tax Issues|
|Appendix A||2018 Federal Tax Calendar for Individual Taxpayers|
|Appendix B||2017 Federal Tax Rate Schedule|
|Appendix C||2018 Federal Tax Rate Schedule|
|Appendix D||2017 Maximum Effective Rates|
|Appendix E||2018 Maximum Effective Rates|
|Appendix F||2018 Federal and State Tax Returns Due Dates|
Editor-in-Chief: Marie Arrigo
Managing Editors: Tom Hall, Dan Gibson, Robert Levin
Co-Editors: Gary Bingel, Angela Chen, Denise DeLisser, Carolyn Dolci, Stephanie Hines
Contributors: Jonathan Acquavella, June Albert, Peter Alwardt, Ben Aspir, Paul Bleeg, Cindy Feder, Jean Jiang, William Gentilesco, Matthew Halpern, Joseph Held, Cindy Huang, Sue Huang, Seth Komitzky, Cindy Lai, Kevin Sohr, Jeanne Marie Waldman, Holly Wong
This tax guide highlights tax planning ideas that may help you minimize your tax liability. This guide does not constitute accounting, tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter. The best way to use this guide is to identify those issues which could impact you, your family, or your business and then discuss them with your tax advisor.
The discussion in this guide is based on the Internal Revenue Code as amended through March 15, 2018. Future legislation, administrative interpretations, and judicial decisions may change the advisability of any course of action. Because of periodic legislation changes, you should always check with your tax advisor before implementing any tax planning ideas.
Any tax advice contained in this publication (including any attachments) is not intended for and cannot be used for the purpose of (i) avoiding penalties imposed by the Internal Revenue Code or (ii) promoting, marketing, or recommending any transaction or matter addressed herein.
© Copyright 2018 by EisnerAmper LLP. All rights reserved. This book, or portions thereof, may not be reproduced in any form without permission of EisnerAmper LLP.