Laurie Marshall, MBA, CFP®
LJPR Financial Advisors
With sweeping tax reform legislation signed, see how it affects your family in 2018. There are five categories with important changes; Deductions and Exemptions, 529 Accounts, the Kiddie Tax, Alimony and Pass-Through Entities.1
1. Deductions and Exemptions
- Standard Deduction
- In 2018, $12,000 for single and $24,000 for married couples filing jointly (these will revert to current levels in 2025 – $6,350 for single, $12,700 for married)
- Personal/Dependent Exemptions
- $4,050 each in 2017, no longer exist in 2018
- The Child Tax Credit is now $2,000 per child, up to $1,400 of which can be refundable to you, even if you do not owe any taxes. The income level has gone up to $400,000 for married tax filers.
- There’s also a $500 credit for each dependent that is not a child, think elderly parents.
- The Tuition and Fees Deduction was removed – This was an extended benefit that expired at the end of 2016, and allowed taxpayers to reduce taxable income by up to $4,000.
- The Mortgage Interest Deduction on new loans has been lowered to interest on loans up to $750,000 (going forward); interest paid on existing debt up to $1,000,000 is grandfathered. Interest on primary residence and one secondary residence can be deducted subject to above limits. Interest on home equity debt is no longer deductible.
- The State And Local Tax deduction is limited to $10,000 for married, single and head-of-household taxpayers and $5,000 for married filed separate taxpayers
2. Section 529 Accounts
- The tax-advantaged savings accounts for college have been expanded, so that money can also be used for Kindergarten through 12th Up to $10,000 can be withdrawn annually for pre-college education.
3. The Kiddie Tax
- Once income in your child’s name is over $2,100, the earnings are now taxed at the trust/estate tax rate, (top bracket of 37%), not the parents’ highest marginal tax rate
- Currently deductible for the payer, taxable to the receiver
- Beginning with divorce and separation agreements finalized after 2018
- Payer may not deduct alimony paid, and
- Recipient (?) doesn’t have to pay taxes on alimony received
5. Pass Through Entities
- In an attempt to level the playing field between large corporations and small, the owners of non C-corporations (e.g., sole proprietorships, partnerships, S-Corporations, LLCs) may be able to deduct up to 20% of their ‘Qualified Business Income’ (QBI) on their tax return beginning in 2018. Making it simple (and it is not), say Louise and Tom own a cabinet business. They have it set up as a Subchapter S corporation. They have $150,000 of pass-through income from the business, and take salaries of $100,000. They would deduct $30,000 of QBI from their income. This QBI deduction is a reduction of Taxable Income, and not Adjusted Gross Income.
What’s the Same?
- College Costs
- Deduction for student loan interest remains
- Grad student tuition waivers stay tax free
- Lifetime Learning Credit and the American Opportunity Tax Credit remain
- Employer-Related Programs
- Employer-Paid Tuition – Amounts paid on your behalf by an employer up to $5,250/year are not considered taxable income for you
- Adoption assistance programs
- Dependent care accounts that enable employees to put up to $5,000 in a savings account tax free (these will be eliminated in 2023)
- Since the exemption for your dependents is gone, it may make sense for your kids to file their own taxes
- If you own a business, see a tax professional about the QBI deduction; how it might apply to you.
There are often opportunities to optimize your tax situation! To make a tax plan, discuss your family or ask questions, please contact me at LJPR Financial Advisors by emailing me at email@example.com, or by calling 248-641-7400.
1 See “What’s in the Final Republican Tax Bill” on our web site for more details on tax rates and brackets, itemized deductions, mortgage interest, and many other details on the new plan.