2018 Tax Cuts and Jobs Act: Highlights & Low-lights

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Posted on 4/16/2018 by David M. Dion

The 2018 Tax Cuts and Jobs Act: Highlights & Lowlights

If you’re like most folks then you greeted the latest changes to the federal income tax code with at least modest anxiety.  How will it affect me and more importantly will I even understand it all?  At Mad River Valley Real Estate we know some of these changes will have an important and in some cases dramatic impact on our clients.  Thanks to our friends at Hall & Holden, PC we’ve been able to make some sense of it all.

Please understand I am only moderately informed about this piece of federal legislation with wide sweeping changes. No, I am not an accountant and after wading through all of this if I ever wanted to be an accountant before I definitely do not want to be an accountant now. If you don’t have one, get one. If you do have one, send an especially nice note of thanks when s/he prepares next year’s tax returns for you.

As far as I can tell some local real estate markets and particularly markets in high cost, high tax areas, will likely see real estate sale prices decline as a result of the legislation’s new restrictions on mortgage interest and on state and local taxes. I’d say that’s a sure bet.

Otherwise following are bits and pieces of information in an attempt to offer a relatively simple, straightforward explanation. Yeah right! You might want a double expresso to get through this…

So first some good news. Income tax rates will be going down. Woohoo!! Following is a nifty chart I found on line that’s pretty easy to follow:

Federal Tax Rate: Single Filer

Current Law                                                                                                Tax Cuts and Jobs Act

10%             $0-$9,525                                                                               10%              $0 - $9,525

15%              $9,525 - $38,700                                                                    12%              $9,525 - $38,700

25%              $38,700 - $93,700                                                                 22%             $38,700 - $82,500

28%              $93,700 - $195,450                                                               24%             $82,500 - $157,500

33%              $195,450 - $424,950                                                             32%              $157,500 - $200,000

35%              $424,950 - $426,700                                                             35%              $200,000 - $500,000

39.6%            $426,700+                                                                             37%              $500,000

Federal Tax Rate: Married Filing Jointly

Current Law Tax Cuts and Jobs Act

10%               $0 - $19,050                                                                          10%               $0 - $19,050

15%               $19,050 - $77,400                                                                  12%               $19,050 - $77,400

25%               $77,400 - $156,150                                                                22%               $77,400 - $165,000

28%               $156,150 - $237,950                                                              24%               $165,000 - $315,000

33%               $237,950 - $424,950                                                            32%               $315,000 - $400,000

35%               $424,950 - $480,050                                                            35%               $400,000 - $600,000

39.6%            $480,050+                                                                             37%               $600,000+

Now some not so great news for some of us:

Mortgage Interest Deduction

• Reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Neither limit is indexed for inflation.

• Homeowners may refinance mortgage debts existing on 12/14/17 up to $1 million and still deduct the interest, so long as the new loan does not exceed the amount of the mortgage being refinanced.

• Repeals the deduction for interest paid on home equity debt through 12/31/25. Interest is still deductible on home equity loans (or second mortgages) if the proceeds are used to substantially improve the residence.

• Interest remains deductible on second homes, but subject to the $1 million / $750,000 limits.

Deduction for State and Local Taxes

• Itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies for both single and married filers and is not indexed for inflation.

• Precludes the deduction of 2018 state and local income taxes prepaid in 2017.

Standard Deduction

• The always popular standard deduction will increase from $6,350 to $12,000 for single tax payers and increase from $12,700 to $24,000 for joint returns. The new standard deduction is indexed for inflation.

Repeal of Personal Exemptions

• Under the prior law, tax filers could deduct $4,150 in 2018 for the filer and his or her spouse, if any, and for each dependent. These exemptions have been repealed in the new law.

Child Credit

• Increases the child tax credit to $2,000 from $1,000 and keeps the age limit at 16 and younger. The income phase-out to claim the child credit was increased significantly from ($55,000 single/$110,000 married) under current law to $500,000 for all filers in the final bill.

Deduction for Casualty Losses

• Provides a deduction only if a loss is attributable to a presidentially-declared disaster.

Moving Expenses

• Repeals moving expense deduction and exclusion, except for members of the Armed Forces. Corporate Tax Decreases the tax rate for corporations from 35% to 21%

Independent Contractor Income

Independent contractors and pass-through business owners with personal service income, including real estate agents and brokers, with taxable income below the $157,500 or $315,000 thresholds may generally claim the full 20% deduction under the personal service income exception. Independent contractors and pass-through business owners with non-personal service income and total taxable income below these thresholds may also claim the full 20% qualified business income deduction. In addition, independent contractors (or other sole proprietors) with non-personal service incomes above these thresholds may also be able to claim a 20% deduction, but that deduction may be limited by the wage and capital limit exception.

Entertainment Expenses

No deduction is allowed with respect to:

• An activity generally considered to be entertainment, amusement, or recreation;
  
  
• Membership dues with respect to any club organized for business, pleasure, recreation or other social purpose, or
  
  
•  A facility or portion of a facility used in connection with the above items.

Essentially the provision repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.

Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).

The above is by no means meant to report on all of the changes to the IRS tax code (I think there were 70 in all), but rather to give you a flavor for what it’s all about.  

What’s the moral of this story.  Go and hug your accountant and be thankful you do not have to remember all of this!