2018 US Tax Reform

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President Trump Tax reform bill is now a law. As of Friday, December 22, 2017 the new tax law will lower business and individual tax rates, modernize US international tax rules, and provide the most significant overhaul of the US tax code in more than 30 years. 

1. New individual tax rates and brackets

From 2018 to 2025, the new law will retain  seven tax brackets, where six of them are at lower rates. In 2026, Trumps tax relief will stop and back to the current-law rates and brackets. The TRUMP Tax rate brackets under the new law are as follows.

  Single Joint Head of 
household
10% tax bracket  $0 – $9,525  $0 – $19,050  $0 – $13,600 
Beginning of 12% bracket $9,526 $19,051 $13,601
Beginning of 22% bracket  $38,701 $77,401 $51,801
Beginning of 24% bracket  $82,501 $165,001 $82,501
Beginning of 32% bracket $157,501 $315,001 $157,501
Beginning of 35% bracket  $200,001 $400,001 $200,001
Beginning of 37% bracket  $500,001 $600,001 $500,001

However, many, not all of the new law will go into effect Jan 1, 2018

2. No change in tax law for long-term capital gains and dividends

 

The Trump Tax law retains the existing 0%, 15% and 20% tax rates on long-term capital gains and dividends.

The 2018, the rate brackets are as follows.

  Single Joint Head of 
household
0% tax bracket  $0 – $38,599  $0 – $77,199  $0 – $51,699 
Beginning of 15% bracket $38,600 $77,200 $51,700
Beginning of 20% bracket  $425,800 $479,000 $452,400

3. No mandatory FIFO stock basis rule

Starting 2018, the Senate version of the tax reform bill would have forced you to use the first-in-first-out (FIFO) method to calculate the tax basis of shares that you sell from taxable accounts. If the price of the shares stair-stepped higher as you bought them, having to use the FIFO method would have meant that your taxable gain would be figured by treating the oldest and cheapest shares as being sold first. That would maximize your gain and maximize the resulting tax hit. lucky for us, this didn’t pass so it’s business as usual.

Year-end planning impact: No change!

4. Higher standard deductions to replace personal and dependent exemption deductions

The new law almost doubles the standard deduction amounts, starting in 2018. However, personal and dependent exemption deductions, which would have been $4,150 each for 2018, are eliminated. Obviously, these changes will benefit some taxpayers and harm others. If you have many dependents, you may not be pleased. The 2018 standard deduction amounts are as follows.

• $12,000 for singles (up from $6,350 for 2017)

• $24,000 for joint-filing married couples (up from $12,700)

• $18,000 for heads of households (up from $9,350)

Additional standard deduction amounts for the elderly and blind are still allowed.

5. New limits on deductions for state and local taxes

Under old law, you could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. You could also choose to forego any deduction for state and local income taxes and instead deduct state and local general sales taxes.

6. Home mortgage interest deductions has changes

Effective 2018, the revised law reduces the maximum amount of mortgage debt to acquire; a first or second residence for which you can claim itemized interest expense deductions from $1 million (or $500,000 if you use married filing separate status) to $750,000 (or $375,000 if you use married filing separate status).

This change wont affect home acquisition mortgages taken out under binding contracts in effect before Dec. 16, 2017 as long as the home purchase closes before April 1, 2018.

7. No change in home sale gain exclusion rules

The new law keeps the valuable advantage that possibly allows you to exclude from federal income taxation up to $250,000 of gain from a qualified home sale, or $500,000 if you are a married joint-filer. In both the previous House and Senate bills included restrictions on this break, but none of the proposed changes were approved.

8. Expanded medical expense deduction for 2017 and 2018

The House version of the tax reform bill would have killed the itemized deduction for medical expenses. Instead the new law preserves the deduction and actually expands it to cover medical expenses in excess of 7.5% of adjusted gross income (AGI) for 2017 and 2018 (the old-law deduction threshold for 2017 was 10% of AGI).

9. Education tax breaks preserved

The new law leaves existing education-related tax breaks in place.

10. Other important changes and non-changes

• Starting next year, you will not be able to reverse the conversion of a traditional IRA into a Roth account. Under the old-law rules, you had until October 15 of the year after an ill-advised conversion to reverse it and avoid the conversion tax hit. At this point, it is not clear if this change would prevent you from reversing a 2017 conversion by 10/15/18 or if would only prevent you from reversing a conversion done in 2018 and beyond. So if you have a 2017 conversion that you already know you want to reverse, get it reversed before year-end to be on the safe side.

2017 individual federal income tax brackets

  Single Joint Head of 
household
0% tax bracket  $0 – $9,325  $0 – $18,650  $0 – $13,350 
Beginning of 15% bracket  $9,326 $18,651 $13,351
Beginning of 25% bracket  $37,951 $75,901 $50,801
Beginning of 28% bracket  $91,901 $153,101 $131,201
Beginning of 33% bracket $191,651 $233,351 $212,501
Beginning of 35% bracket $416,701 $416,701 $416,701
Beginning of 39.6% bracket  $418,401 $470,701 $444,551

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