The GOP Tax Bill was signed into law and taxpayers are still trying to figure out how the new tax law changes will affect them. Depending on your household income, your tax savings will be dramatically different. Households with between $50,000 to $75,000 in income will see a tax cut of 1.6 percent or around $870 while households earning $1,000,000 or more will see an average cut of 3.3% or nearly $70,000. Here are several of tax law changes affecting the average taxpayer.
Starting with tax year 2018, the IRS limits the deduction for state, local, and property taxes to $10,000. Furthermore, the tax bill prevents taxpayers from prepaying state and local taxes to get around the $10,000 cap. Unlike state and local taxes, prepayment is a viable option with regard to property taxes regardless of the amount of the deduction. For example, if your property taxes exceed the $10,000 limit, you can prepay property taxes for next year and still take the deduction on this year's federal income tax return.
Use 529 Account for Qualified K12 Education Expenses
529 College Savings Accounts have been expanded. In addition to paying for qualified college expenses, parents can now use $10,000 from a 529 education savings account to pay for private school tuition, K-12 related expenses or private tutoring.
Affordable Care Act Penalties Going Away
Republicans were not successful in repealing and replacing the Affordable Care Act however they were successful in one major change. Starting with tax year 2019, the individual mandate is going away and individuals who no longer purchase health care will no longer have to pay the tax penalty.
Pass Through Business Income Deduction
Pass through businesses such as sole proprietorships, S Corps, partnerships, and LLCs pays tax at the individual level not the business entity level.
With the new tax code, owners of pass-through businesses will be allowed to deduct 20% of their business income which depending on their tax bracket, may lower their tax liability. Owners of professional service businesses such as doctors, lawyers, and consultants that file as single and earn more than $157,500 or file jointly and earn more than $315,ooo will have the deduction phased out and capped. Other businesses that have higher earnings will see their deduction limited to 50% of total wages paid or 25% of total wages paid plus 2.5% of cost of tangible depreciable property, real estate for example.
In addition, pass-through businesses will be able to write off 100% of the cost of capital expenses
Deductions that are Eliminated for 2018
While there are many tax deductions that survived under the new tax law, there are several that did not.
- Tax Preparation Fees
- Moving Expenses
- Casualty and Theft Losses (except in cases of federally declared disaster)
- Unreimbursed employee expenses
- Employer-subsidized transportation and parking reimbursement
- Other miscellaneous deductions subject to the 2% AGI cap