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Five New Tax Law Changes You Need to Know

2018 has been a busy year. So much has happened so far – midterm elections, meetings with North Korea, the Winter Olympics, the rescue of the Thai boys soccer team, Prince Harry tying the knot and the Yanny/Laurel debate just to name a few.

But let’s not forget about some lesser known headlines that were still impactful nonetheless. For example, Don Gorske, a 64 year-old from Wisconsin, achieved what no man has been able to do before – he ate his 30,000th Big Mac. He has consumed two each day for the past 46 years, and estimates that Big Macs make up 90 percent of his diet. I’m still deciding whether I’m more confused how Don Gorske is still alive or why he decided to count how many hamburgers he eats. I know what you’re thinking, and the answer is no, ladies, he has already been spoken for.

Another headline was from this May when a book was returned to the San Francisco Public Library. What’s so interesting about that you may ask? Well, this book was due back December 9, 1970 making it 47 years, four months and 29 days late. The fine should have been $1,731.70 but was luckily capped at $10.01 per library policy. This actually pales in comparison to last year when a man returned his grandmother’s book over 100 years late, also to the San Francisco Public Library. Ironically, the title of the book was Forty Minutes Late.

However, in my world the biggest headlines concern the major tax changes that went into effect in 2018. In no way was the Tax Code simplified as discussed every election. In fact, it just became more confusing and convoluted. And very soon you these tax changes may have a major impact on your bottom line – for better or for worse.

While the changes that went into effect are numerous, below are five key changes that will affect many of you this year.

  1. Child Tax Credit: Before 2018, you were entitled to a tax credit of $1,000 for each dependent child under age 17. The problem was that this credit began phasing out when your combined income reaches $110,000. The new law allows for a $2,000 tax credit per dependent child, and does not begin phasing out until your joint income reaches $400,000.

Who does this affect? This is a huge tax savings for taxpayers with multiple children making below $400,000. For example, a couple with four children and joint income of $300,000 went from a child tax credit of zilch in 2017 to $8,000 in 2018! To be clear, that’s not merely a tax deduction of $8,000. This is $8,000 in actual cash that you are saving. From a pure financial standpoint, children are the absolute worst investments. However, this coming tax season may be the year you finally get some return on your investment.

  1. AMT Tax: The AMT tax is simply a different way to calculate your taxes. The calculation runs parallel to the “normal” calculation and you will pay the higher of the two calculations. The AMT was initially instituted in 1969 to ensure the high-income earners who had a multitude of deductions were still paying their share of taxes. But slowly this turned into the absolute worst tax because while salaries have increased since 1969, the AMT was not adjusted for inflation each year. As a result, the AMT has hit a growing number of taxpayers every year. While the intended result was hit the high-income earners, it actually hurts the middle-class families much more. There are a couple of reasons how the AMT tax has changed in 2018: (1) the new laws increased the AMT exemption amounts; and (2) many of the deductions that were added back in the AMT calculation are no longer deductible. As a result, a lot less people will be paying AMT this coming tax season.

Who does this affect? The AMT tax has usually affected many taxpayers in the $200k-$500k income range. This has resulted in thousands more in taxes for some of these taxpayers in the past. Many of these taxpayers will either pay less AMT tax or none at all in 2018.

  1. Property Taxes and State Income Taxes: You’ve always taken comfort in the fact that despite paying high property taxes and state income taxes, you knew you could deduct those on your tax return as an itemized deduction. But that’s not the case anymore. Beginning in 2018, you may only deduct a total of $10,000 for the state income taxes and property taxes you pay. In New Jersey, especially in certain counties including Bergen County, your property taxes alone can easily be double this. So, you may pay $15,000 property taxes and $15,000 in state income taxes from your paychecks during the year, but instead of deducting $30,000 like you did in 2017, you will now deduct $10,000.

But as bad as this sounds (and it is for some taxpayers) it may not affect you much at all to your surprise – even if you pay a lot for property taxes and state income taxes. See, if in the past you’ve been subject to AMT tax (see #2 above) then you haven’t been benefiting from these taxes anyhow. That’s because under the AMT tax calculation there is no deduction for state income taxes and property taxes.

Who does this affect? The ones that will be hit by this tax change are the ones that have not been subject to AMT but still have high taxes. For example, you could be making $1,000,000 with a $60,000 property tax bill, paying $50,000 in state income taxes, and your normal tax calculation comes out higher than your AMT tax calculation thus making you exempt from AMT. Instead of deducting $110,000 like you did in 2017, you will only deduct $10,000.

  1.  Lower Tax Rates: The tax rates have been adjusted very favorably for taxpayers. The highest rate went from 39.6 percent to 37 percent. And the change will be felt throughout the tax table. A couple with taxable income of $300,000 paid at a maximum rate of 33 percent in 2017 but only a 24 percent rate in 2018.

Who does this affect? Almost everyone.

  1. 199A Tax Deduction: Beginning in 2018, if you operate your business as a sole proprietorship, partnership, or S corporation then you’re eligible for a deduction up to 20 percent of the business income. So if your income from the business was $100,000 then you may now be eligible for a new $20,000 tax deduction that didn’t exist in 2017.

Who does this affect? Taxpayers that have a sole proprietorship, partnership or S Corporation.

By Daniel Magence

Daniel Magence, CPA, Esq. is a principal at Pristine CPA Solutions, LLC ( Pristine CPA Solutions offers tax and accounting services to individuals and businesses of all sizes, whether its tax returns, bookkeeping, payroll services, or personal income budgeting. He can be reached at [email protected] or 201-326-6908 if you have any questions or comments, or are interested in using Pristine CPA’s services. Feel free to contact us for a free consultation.

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