In our last post, the Grim Reaper made us painfully aware of the bad parts of the new tax law for individuals. Since our obligation to him from that unfortunate lawsuit is done, we can move on to the goodies in the new tax law for individuals.
First, tax rates for most people are going down by 3%. For the top tax bracket, rates are only going down 2.6% from 39.6% to 37%. This is my favorite change to the new law, because it benefits almost everyone. Not only are the rates going down, but the income brackets have widened so that you must earn more income to get pushed into higher tax rates.
Next, alternative minimum tax (AMT) is going away for most people. AMT is the hidden tax that we calculate alongside your regular tax liability. If the AMT is higher, you pay the AMT calculated tax. AMT reduces the effectiveness of many of your deductions and tends to raise the taxes of people, who typically earn between $200K and $600K – many of our clients.
There are two reasons AMT will go away for most people. First, for AMT purposes, the deduction for state and local taxes is disallowed. Under the new tax law, because the deduction for state and local taxes is limited to $10,000, the amount that AMT can disallow is only $10,000. Therefore, state and local taxes are much less likely to cause AMT.
Second, the exemption amount for AMT has been substantially increased. So far in our 2018 projections, we are not seeing many people pay AMT until their income gets to about $750K. Thus, almost all of our clients will be spared from paying AMT in 2018 and beyond until at least 2025.
Next, the standard deduction is going up to $12K for single taxpayers, $18K for head of household filing status, and $24K for married filers. Does this mean you are losing deductions? No. It just means that many people will no longer need to itemize deductions as the standard deduction will be higher.
In earlier blog posts, I covered the new 20% business deduction for pass through entities. So I won’t cover it in detail here. Please refer to those earlier posts for details, but this deduction is a huge benefit for small business owners.
Finally, the child tax credit has been increased to a maximum of $2,000 per child per year, and the income level where the credit phases out has increased from $100K to $200K. Many more families will qualify for the increased child tax credit.
As you can see, there are lots of goodies for individuals in the new tax law. The Grim Reaper didn’t want you to know about any of them.
The new tax law is complex, however. We recommend that you have us run real projections to see how the new tax law will benefit or hurt you. In most cases, people should be adjusting their income tax withholding. We can only help you do that by running projections with your 2018 income and deductions.
If you would like for us to run a 2018 projection for you, please contact us at (703) 818-8284.
Thanks for reading!
Frank Stitely, CPA, CVA
Member / partner
SK CPAs & Business Advisors PLLC