By DENNIS GRUBAUGH
The most significant tax law change since 1986 has CPAs and taxpayers calculating ways to adjust for what is likely to be a busy tax season.
The interest was obvious at a special year-end tax-planning seminar held this past month by Scheffel Boyle CPAs: The event packed the house at the N.O. Nelson Campus of Lewis and Clark Community College in Edwardsville.
Mike Fitzgerald, a CPA who heads up the tax department for Scheffel, one of the largest accounting firms in the Metro East, said the new 1040 will look simple this year, about a half page on the front and a half page on the back.
But many new schedules and other complexities have been added in.
“So, it’s not simplified at all,” he said.
The measures are part of the 2017 Tax Cuts and Jobs Act. There are numerous changes affecting individuals, businesses, and estates and gifts.
The new, individual tax rates still have seven tax brackets, but the percentages and amounts of income that the percentages are applied against for taxation both have changed. For instance, if you are married and filing jointly, your top tax bracket is now going to be 37 percent for income over $600,000. That was changed from 39.6 percent on income over $470,000. Similar percentage changes were made for single filers.
“What they’ve done is expanded those brackets and lowered the rates so that more income is going to be subject to lower rates,” said Fitzgerald, who is principal of Scheffel Boyle’s Alton office.
A big change for taxpaying families is the removal of a $4,050-per-person exemption for each dependent.
However, the standard deduction has been increased for every category of filer, which has led to questions.
“There is some confusion out there that some people won’t be able to itemize,” Fitzgerald said. “That is not the case. But you’ll only itemize if your itemized deductions are greater than the standard deduction.”
Last year, the standard deduction for a single filer was $6,350. This year it’s $12,000. Married filing jointly is up from $12,700 to $24,000. A lot more people may be taking the standard deduction as a result.
Another big change is the limit in mortgage and home equity interest deductibility. Under the old law, you could take a deduction of interest on properties up to $1 million of debt and on home equity debt of $100,000. Also, the home equity could be used for any purpose.
That has changed: There is now a cap of $750,000 of debt, which includes home equity loans, and home equity loans must be used to buy, build, or substantially improve the taxpayer’s home.
Charitable donations remain fully deductible, Fitzgerald said. But casualty and theft loss deduction has been eliminated in the new law (except for losses in federally declared disaster areas).
Moving expense deductions have also been eliminated except for active members of the military.
All miscellaneous itemized deductions have been eliminated. Among those, Fitzgerald lists union dues, investment fees, safe deposit fees, professional dues, IRA fees and gambling losses.
Looking ahead, and if you happen to be planning a divorce, alimony will no longer be deductible if a divorce is executed after 2018.
Major changes have also been implemented that would affect those subject to the Alternative Minimum Tax. Mainly, they involve the “big preference items” that people used at arriving at a minimal taxable income, one being the deduction for exemptions, which has been eliminated; and a second being that state and local income taxes and other taxes have been capped at $10,000.
529 plans for tuition have been expanded so that tax-free distribution of earning applies not only to college education but also up to $10,000 a year can be used to pay for elementary, private or religious school tuition. (The distributions are taxable in Illinois if previously deducted on the Illinois 1040 form.)
Other big, individual changes:
The child tax credit has been increased from $1,000 to $2,000 per qualifying child under 17
A new nonchild tax credit has been added, $500 for qualifying dependents 17 or older (such as parents, grandparents or others)
The Affordable Care Act individual mandate has been repealed — there will no longer be a penalty for people without health insurance starting in 2019.
Some business changes
C Corporations have a flat 21 percent tax rate under the new law, compared to five brackets that ranged from 15 percent to 34 percent
Corporate Alternative Minimum Taxes for C Corporations are repealed for years after 2017.
Section 179 deductions have been increased for all corporations (for such things as equipment, furniture and fixtures, but not real estate). Section 179 allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated.
A new Bonus Depreciation law allows immediate expensing of either new or used property, allowing taxpayers to write off certain expenses.
A new Section 199A Deduction, which is still being formalized, will allow individuals to generally be able to deduct 20 percent of income from a qualified business or trade operating as a partnership, S Corporation, or sole proprietorship. This will go through tax years 2018 to 2025. The 20 percent will not reduce adjusted gross income but it does reduce taxable income.