It’s the season we all love again… tax season. In addition, the Tax Cuts and Jobs Act goes into effect this year, and you may have already seen some changes as you prepare your 2018 tax return. While some of these changes are permanent, many are scheduled to sunset at the end of 2025 (reverting to the 2017 tax code).
Below is an overview of how the new Tax Cuts and Jobs Act—arguably the largest overhaul of the U.S. tax code since the Ronald Reagan era—will affect you.
FIRST, A REMINDER
***Make sure to upload your tax documents to your eWealth vault (especially your current, 2018 return)! This helps us integrate them into your financial plan and better plan for your future.***
Colorado Specific Tax Cut Update
If you claim the standard deduction on your federal taxes and do not itemize, you can take a deduction on your Colorado income tax return for your charitable contributions that exceed $500 for that tax year. This may become more common as many taxpayers will be taking the standard deduction. If you are charitably inclined, don’t miss this tax savings tip! Please speak with your CPA if this could apply to you.
Positive Changes
- Standard deductions nearly double to $24,000 for couples, $12,000 for singles, and $18,000 for household heads.
- Child tax credit doubles to $2,000 for each dependent under age 17. The income phase-out limit starts at $200,000 for singles and $400,000 for married filing jointly, thus the credit will be available to far more families.
- The phase-out of itemized deductions for Upper-income individuals has been eliminated under the new law.
- The new law includes a change that allows the use of 529 college savings plan for tuition for elementary and secondary education (up to a $10,000 limit per student per year, tax free). However, the state of Colorado does not consider withdrawals for Elementary and Secondary education to be qualified withdrawals, and will charge the 10% penalty on these distributions. Each state is different, so we recommend you speak to your accountant before making any decisions regarding your 529 distributions.
- The individual lifetime estate (inheritance) and gift tax exemption doubles to almost $11 million, which means fewer estates will be subject to this tax (at least until 2025).
- The law keeps seven tax brackets, but with different rates and break points. For example, not only is the top individual rate lowered from 39.6% to 37%, but that rate kicks in at a higher income level. And, note that whatever new bracket you fall into, more of your taxable income will be hit with lower rates than before.
| Rate | Single | Married Filing Jointly | Head of Household |
| 10% | $0-$9,524 | $0-$19,049 | $0-$13,599 |
| 12% | $9,525-$38,699 | $19,050-$77,399 | $13,600-$51,799 |
| 22% | $38,700-$82,499 | $77,400-$164,999 | $51,800-$82,499 |
| 24% | $82,500-$156,999 | $165,000-$314,999 | $82,500-$157,499 |
| 32% | $157,000-$199,999 | $315,000-$399,999 | $157,500-$199,999 |
| 35% | $200,000-$499,999 | $400,000-$599,999 | $200,000-$499,999 |
| 37% | Over $500,000 | $600,000 and up | $500,000 and up |
Negative Changes
- Home mortgage interest can only be deducted on up to $750,000 on NEW (new mortgage after December 15, 2017) primary and secondary residences (down from $1M previously).* The $1M limit may still apply if you refinance later if certain conditions apply.
- Residential property taxes and income/sales taxes are limited to deductions up to a $10,000 cap (it was unlimited before).
- The deduction for interest paid on certain types of home equity line of credit (HELOC) is suspended. If the HELOC was used for original indebtedness or for home improvements, then interest deduction is still allowed.
- Write offs for all miscellaneous deductions (with a 2% of Adjusted Gross Income (AGI) threshold) were eliminated. Employee business expenses, brokerage fees, and tax prep costs to name a few.
- Personal exemptions for individual tax filers and their dependents are repealed.
- Under the new tax bill, the tax deduction for alimony payments post-2018 is eliminated, and recipients no longer need to treat alimony received as taxable income.
- Elimination of the Roth Conversions “Do- Overs” – this mean you cannot change your mind and unwind a Roth conversion via a recharacterization. Previous to the new law, recharacterization was a nice planning strategy.
Business Impacts
- Business tax rate is reduced to 21% for C-Corporations. S-Corp, LLC’s, and sole proprietors may be eligible for a new 20% qualified business income deduction.
- There is a new incentive in the form of lower taxes for businesses that repatriate assets from foreign countries back to the USA.
- Section 179 (accelerated depreciation) is almost doubled, from the 2017 amount of $510,000 to $1,000,000 for 2018. Also, enhancements were made to Bonus depreciation.
- Elimination of the deduction for business entertainment expenses. Also, all meal expenses are now limited to a 50% deduction (previously some business meal expense could be written off 100%).
- The corporate Alternative Minimum Tax (AMT) is eliminated.
Overall, the law should mean a lower tax bill and simpler filing for millions of Americans. How much you can expect to save depends on your particular circumstances. We recommend you consult with your tax advisor to learn how you are personally affected by these tax cuts and how to take advantage of planning opportunities that will affect your financial planning.
