Planning Ahead for 2018’s New Tax Law— what to expect

Renner Tax News, September 4, 2018

Planning Ahead for 2018’s New Tax Law— what to expect

John J. Renner, II, CPA, CFF, CGMA, Managing Shareholder, Renner and Company, CPA, P.C.

By now, you’ve heard a lot about the new tax law.  Will your 2018 taxes be lower, or will you owe more on April 15th?  As we approach the end of the year, it’s time to find out.

Here are some of the changes:

  • Tax rates have generally gone down. For example, Taxable income of $200,000 that used to be taxed at the rate of 28% will now be taxed at 24%.
  • No personal exemptions. No more questions about who qualifies to be your dependent, it doesn’t matter anymore.
  • The deduction for taxes is capped. Your deduction for state income taxes (or sales tax, if you choose that option) and real estate taxes can only total $10,000.  There’s no more deduction for car tax.
  • Charitable contributions are still deductible. The amount of charitable contributions that you can deduct is now limited to 60% of your adjusted gross income, for contributions to most types of charities.  This is an increase from the old charitable contribution limit of 50% of your adjusted gross income.
  • No more miscellaneous itemized deductions. These have been eliminated by the new law.  You can no longer deduct miscellaneous itemized deductions, including investment management fees, tax preparation fees, safety deposit box fees and employee business expenses.
  • No income-based reduction of itemized deductions. Under the old law, as your income went up, your total itemized deductions went down.  The new law does away with that.

How might the new law affect your 2018 return?

Itemizing vs. taking the standard deduction.  While itemized deductions may be going down, the new law increases the standard deduction to $12,000 for single taxpayers and $24,000 for married with adjustments for taxpayers over age 65.  As in the past, you can still deduct the greater of your allowable itemized deductions or the standard deduction.  If many of your old deductions are now limited or eliminated, you may be taking the standard deduction on your 2018 return.

Note that if you itemize deductions on your federal return, you must also itemize for Virginia.  The Virginia standard deduction is only $3,000 for single taxpayers and $6,000 for married.  If you use the standard deduction on your federal return, your Virginia taxes might come out higher.

How will Virginia handle the taxes deduction?  State income taxes are not deductible on your Virginia return, but they are part of your $10,000 taxes deduction on your federal return.  Virginia has not determined how real estate taxes and state income taxes will be allocated on the Virginia return.

It will really be necessary to calculate both the federal and the Virginia tax liability to determine whether itemizing your deductions or taking the standard deduction produces a lower tax liability overall.

You may be saying good bye to alternative minimum tax.  Some of the deductions that used to put you in an alternative minimum tax position are no longer deductible.  Now, your regular tax may not dip down below the alternative minimum amount any more.  In this area, the elimination of personal exemptions and miscellaneous itemized deductions and the capping of the deduction for taxes paid may not be all that bad.  If you were subject to alternative minimum tax in the past, you weren’t getting the benefit of these deductions anyway.

Kiddie tax rate will change.  The 2018 tax rate on the unearned income of children is no longer the parents’ tax rate.  Now it is the same as the tax rate used for trusts.  This may be higher or lower than the parents’ tax rate.

To find out how this all will affect your tax return, you have to run the numbers. 

With all these moving parts, there is no simple answer.  The only way to determine how these changes will affect your tax return is to project your 2018 taxable income using the new tax rules and new tax rates, and see if your withholding will be enough.  With this information, you’ll still have time to adjust your withholding and estimated payments and avoid a surprise cash crunch on April 15th.

Contact us to discuss your information in greater detail.

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