After months and months of discussion, the tax reform legislation has passed Congress and the President has signed. One interesting tidbit is that the chief architect of the bill, Congressman Kevin Brady, is a 1973 graduate of Rapid City Central High School. Now we can help guide how this bill will impact your income taxes in 2018 and beyond.
Because we don’t have a state income tax, substantially all South Dakota taxpayers will pay less federal income tax under the new law.
Income Tax Brackets: The seven tax bracket format we currently have will remain. However, the rates and the size of the brackets have changed. Interestingly, these new brackets eliminate the marriage penalty through the 32% bracket, as the joint bracket is exactly double the single.
Standard Deductions and Personal Exemptions: The standard deduction will increase to $12,000 for individuals, $18,000 for Head of Household, and $24,000 for married filing joint. This sounds like a great increase, until you factor in that they removed the personal exemptions. If you were a married couple with no kids and do not itemize, this is a benefit to you. However, if you do itemize or have several dependents, this may create more tax due for you. The good news, is that the expanded Child Tax Credit will likely offset any additional tax.
Kiddie Tax: If you have kids that have unearned income greater than $2,100, I have good news and bad news. The good news is you no longer have to wait for your return to be done to calculate their return. The bad news is their tax is now calculated using the Trust and Estate tax rates which have very small brackets which reach the top tax bracket very quickly.
Child Tax Credit: For dependent children under 17, the credit will double to $2,000 per child with $1,400 being refundable, if you otherwise don’t owe tax.
Mortgage Interest Deduction: Under the old rules, you could deduct interest on loans up to $1,000,000 for home acquisition debt and another $100,000 on home equity lines. Under the new law, the $100,000 home equity line interest deduction is eliminated and the cap on new loans goes down to $750,000. However, if you have an existing loan between the $750,000 and $1,000,000 you are still okay to deduct the interest. Under the sunset provisions of this bill, beginning in 2026, the old law is brought back and you will be able to deduct the interest for both the $1,000,000 mortgage and the home equity debt. Interest on a second home is still deductible under the new law, as long as the total debt is under the limits.
State and Local Taxes and Property Taxes: There will now be an annual cap of $10,000 for the Schedule A deduction relating to the total of state and local income, property or sales taxes. With this cap and the higher standard deduction, it will be less likely for taxpayers to be able to itemize their deductions.
Charitable Contributions: The current annual limit on contributions is 50% of your Adjusted Gross Income. Under the new law, this is increased to 60%. Any amounts above this threshold is still eligible to be carried forward for up to five years.
Miscellaneous Itemized Deductions: You can no longer deduct unreimbursed employee expenses, home office expense (if you are not in business for yourself), certain attorney fees, and investment advisor fees.
Medical Expense Deductions: The deductible threshold is going back to 7.5% of AGI for all taxpayers. And this law is retroactive to the beginning of 2017.
Alimony Deduction: This deduction is repealed for divorces finalized in in 2019 and after. Likewise, the recipient spouse will not have to report the Alimony as income.
Moving Expense Deduction. This deduction is eliminated for most taxpayers.
ACA Individual Mandate: Beginning in 2019, you will no longer have to tell the IRS whether you have health insurance and there will be no penalty for not having it. However, for 2018, the penalty will still apply.
AMT (Alternative Minimum Tax): The law Increases the exemptions to $70,300 individuals and $109,400 for married filing joint. But more important, the exemptions will not phase out until very high income limits. This should dramatically reduce the number of taxpayers impacted by the AMT.
Expiration: Due to the Senate’s budgeting rules, a majority of the individual changes listed above will expire on December 31, 2025 and will revert back to the 2017 law without additional legislation.