For U.S. based taxpayers, the due date for the 2018 federal income tax return (IRS Form 1040) is April 17, 2019. The IRS will begin to accept tax returns on January 29, 2019. For the 2018 income tax return, following the Tax Cuts and Jobs Act (TCJA) passed in December of 2017, taxpayers will experience the most significant changes to U.S. tax law since 1986.
Here are some of the more important tax changes that may be relevant to our readers and clients:
- The top rate has dropped from 39.6% to 37.1%, and takes effect at $600,000 of taxable income for married couples (rather than $480,000). For single taxpayers, the top rate takes effect at $500,000 (rather than $427,000).
- The standard deduction is now $24,000 per married couple and $12,000 for single taxpayers. Last year (for the 2017 income tax return), it was $13,000 and $6,500, respectively. This simplifies filing for many people, but eliminates the specific deductions for mortgage interest and charitable donations. This will affect purchases of homes, obtaining a mortgage and making charitable donations.
- Of significant concern to our clients in states such as New York, New Jersey and Connecticut, Congress put a limit on deductions for state and local taxes (“SALT”). Previously, these deductions were unlimited (although restricted under the Alternative Minimum Tax, AMT). Under the new law, beginning for tax year 2018, taxpayers can only deduct up to $10,000 per tax return for SALT (i.e., a single filer has a $10,000 limit to the deduction, and a married couple filing jointly has the same $10,000 limit as the single filer).
We have been monitoring attempts to overcome this new law and preserve greater SALT deductions. Some local governments in 2018 attempted to convert local property taxes to charitable contributions which may then be deductible. The IRS has already indicated its opposition to such strategies. Some municipalities (e.g., Scarsdale, New York) have abandoned such attempts.
- The estate and gift tax threshold has doubled to $11.2 million per individual and $22.4 million for a married couple. However, this increased threshold is currently set to lapse in 2025 and revert to prior exemption amounts (unless Congress acts to extend or make permanent these exemption thresholds).
The doubling of the estate tax exemption is a significant and rare opportunity to protect more assets from the reach of the estate tax and to instead pass on to one’s heirs. This opportunity, coupled with the IRS’ withdrawal of proposed anti-discounting rules, warrants consideration of family limited partnerships and leveraged gifting, dynasty trusts and other strategies to preserve assets and transfer wealth for your beneficiaries.
- For divorce and separation agreements signed after 2018, alimony payments will no longer be tax deductible, and recipients of alimony will not have to report the alimony payments as income.
- Pass-through business entities (including LLCs, S-Corps and partnerships) may now enjoy a deduction of 20% of net income, but subject to many new rules. For instance, the deduction is phased-out for taxpayers with more than $157,000 of income for single filers ($315,000 for joint filers) and does not apply to lawyers, doctors, accountants, consultants, investment advisors and owners of service businesses. The new rules are complex. Contact us for assistance.
- Despite campaign promises to the contrary, the 3.8% surtax on net investment income (the so-called “Obamacare Tax”) was not repealed. This tax takes effect at $250,000 of adjusted gross income (AGI) for married taxpayers and $200,000 for single filers. As a result, taxpayers would owe 23.8% rather than 20% on long-term capital gains and dividends.
Other tax changes occurred for corporations and foreign income. We can help explain these (and other) new tax law changes, how they may impact your specific situation, and how to legally minimize your taxes. Contact us for a consultation.