This past year has been a particularly busy period of adjustment for businesses and individuals, thanks largely to the historic changes passed into law by the Tax Cuts and Jobs Act of 2017 and the sweeping changes it ushered in. And now, as we prepare to turn the calendars from 2018 and the countdown begins until Tax Day 2019, a number of provisions from this new law will have a major impact on 2018 tax returns, for businesses and individuals alike.
While this is not a “one size fits all” scenario, and certain people may be affected by these new changes in different ways based on their financial situations or filing status, here are some of the highlights people should keep in mind. Every one of these provisions is new for 2018 filing.
For starters on the business side, there is the advantage of a 20% qualified business income deduction that is brand new for sole proprietorships, S corporations and partnerships, and could mean significant savings for businesses of all sizes. There are also new rules governing accelerated depreciation (currently expensed vs. spread over many years); bonus depreciation can be taken for both new equipment (as it had been previously) and used equipment (which is a brand new advantage). Meanwhile the amount of 179 depreciation, if applicable, has increased to $1 million from $500,000.
In terms of possible disadvantages, the business interest deduction is now limited to 30% of adjusted taxable income for companies of certain sizes; as they plan for 2018 filing, this is important for them to keep in mind. As has been widely reported, there have also been major changes to, and limitations placed on, deductions for meals and entertainment expenses, with a whole host of previously tax deductible items no longer qualifying (including club memberships, cultural and sporting events and a large number of outings). Meanwhile, meals are still deductible, but the allowable percentage has changed for a number of categories—this is indeed something to which businesses need to pay close attention when they file next April.
Lastly on the business side, the Tax Fairness Act has lowered the tax rates on C corporations, and many people who currently run S corporations (pass-through entities) are now considering if there is an advantage to convert to a C. One again, it is something to be kept in mind this filing season; as it could prove to be a worthwhile change.
On the individual filing side, the biggest change that will impact upcoming tax returns is the drop in the top tax rate from 39.6% to 37%. But while that is a benefit that many will enjoy, the flipside is that the amount of state and local taxes (SALT) that can be deducted from income taxes is now capped at $10,000, something that could have a particularly negative impact on higher-income northeastern states. Additionally, there is an important change regarding home equity lines of credit—credit lines used for any other reason than home repairs or improvements (such as college payments or other cash infusions) are no longer tax deductible.
Finally, married couples will now enjoy a higher standard deduction of $24,000 (up from $12,700), and also significant is the Family Tax Credit for people with children—previously capped at an income of $110,000 for those filing jointly—has been raised to $400,000.
The bottom line for the year to come is all of those tax changes that took effect this year thanks to the Tax Fairness Act will now become a reality come filing time. Given that this is the most significant change to federal tax law we have seen since the 1980s, the time is now to start planning for what promises to be a busier-than-usual filing season.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.