On Dec. 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act. The legislation affects taxes for both businesses and individuals for 2018 and beyond. Here are some key provisions of the tax law that you should consider when filing your 2018 taxes next year.
You can no longer use personal or intangible property for like-kind exchanges. Exchanges are restricted to real property and such property must not be held primarily for sale.
RESTRICTIONS ON FRINGE BENEFIT DEDUCTIONS.
Businesses no longer can deduct entertainment or recreation expenses, nor can they deduct club memberships or the cost of a facility used for such activities. And employees who are not reimbursed for business expenses can no longer deduct them.
DEDUCTION OF BUSINESS INCOME
Good news forowners of qualified sole proprietorships, partnerships, trusts and S corporations: many will be able to take a 20 percent deduction of their qualified business income. To take the deduction, you will need to have earned less than $315,000 of taxableincome if filing a joint return and less than $157,500 if filing as single, head of household or married filing separately. Consult a CPA to be sure you qualify.
TAXES ON ESTATES
The tax reform act doubles the exemption for estates compared to previous years. Now only individual estates valued at $11.18 million or more are subject to a 40 percent estate tax. For married couples, the exclusion applies to estates valued less than $22.36 million.
NO MORE PERSONAL EXEMPTIONS
The new tax bill eliminates personal exemptions for the taxpayer and dependents.
INCREASE IN STANDARD DEDUCTIONS
Married filing jointly taxpayers now can automatically take a $24,000 standard deduction (previously only $12,700); whereas, heads of households can take $18,000 off (previously $9,350) and individuals or married filing separately $12,000 ($6,350). For many taxpayers, this will mean the automatic deduction will cover more than they usually claim for typical deductions, including home mortgage interest, state and local taxes, medical expenses and charitable contributions.
REDUCED PROPERTY & STATE TAX DEDUCTION
The tax reform bill capped the combined deduction for state and local taxes, including property taxes, to $10,000. Because California is a high tax state, many California homeowners will find the limitation will not enable them to surpass the standard deduction (see above) even if they itemize all other deductions.
ALTERNATIVE MINIMUM TAX
Instituted in 1969, the Alternative Minimum Tax was created so that wealthy people could not get away with not having to pay taxes because of deductions they might take. They (or their accountants) had to figure out their federal tax both the standard way and under AMT criteria, which did not allow certain deductions that could be taken under the standard method. The taxpayer then had to pay the higher of the two tax bills. Unfortunately, the AMT was not indexed for inflation. As a result, more and more people—not just the well-to-do—found they had to pay the AMT.
While the AMT has not gone away, fewer people will likely have to pay it compared to previous years. That’s because Congress raised the exemption amount for taxpayers subject to the AMT (e.g., single or head of household taxpayers are exempt if they earn less than $70,300 in taxable income for 2018). Also, Congress indexed the exemption amount to inflation.
ADJUSTMENTS IN TAX RATES
While the number of tax brackets remains the same as previous years, the tax rates for 2018 are lower than for 2017. Rates for this year are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
The end of the year is only three months away. If you have not done so already, you should schedule an appointment with your CPA to review your tax status and to determine if there is anything you can do to legally lower your 2018 tax bill between now and Dec. 31.
If you would like to learn more about how the Tax Cuts and Jobs Act will affect your business, you should attend the CalCPA Education Foundation Federal, State, Local and International Taxation Conference, Nov. 15-16, in Burbank. The conference will discuss federal and state tax developments and regulations affecting individuals, corporations, estates and trusts. For information and registration, go to www.CalCPA.org.
Miklos Ringbauer, CPA, is first vice president of the Los Angeles Chapter of the California Society of CPAs and a founder of MiklosCPA, Los Angeles.
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