The wait is almost over, and we will all soon figure out how the Tax Cuts and Jobs Act will impact us personally. There are plenty of changes to consider. While some are sure to benefit you, others may not. Unless you’re a tax nerd like me, you probably don’t care too much about the details and just want to know the answer to one question: will the net impact cause you to pay more or less federal income taxes? I wish there was an easy answer to that question for taxpayers of all shapes and sizes, but with so many changes across the board, there are going to be lots of winners AND losers.
Instead of providing a comprehensive list of changes and leaving you to figure out how each one will show up on your 2018 tax returns, I thought it would be useful to compute that answer for one fictional taxpayer (let’s call him “Bill”). Since Acuity specializes in servicing small businesses, we’ll make Bill a sole proprietor who reports his business income on Schedule C of his personal tax return. For 2017, let’s say Bill was married with 2 dependent children and had $125,000 in income from his business as well as $75,000 in wages from an employer. Below is a copy of Bill’s 2017 1040 tax return. Assuming identical circumstances for 2018, I’ve added a column to the right with updated numbers based on the 2018 changes that went into effect. Below the return is a table explaining each of the changes that impact Bill. There are many more changes than the five I’ve listed below, and a quick Google search should provide a complete list of them all.
|Summary of Change||Comments|
|1||The standard deduction for a married taxpayer filing jointly increased from $12,700 to $24,000.||This example does not address the numerous changes that impact itemized deductions. If you filed a Schedule A in 2017 and expect to do so again in 2018, you might want to take a second to familiarize yourself with the changes. This article does a good job of explaining them.|
|2||Personal and Dependent Exemptions were eliminated.||With a total of 4 exemptions in 2017, Bill will lose out on a tax deduction of $16,200 in 2018.|
|3||There is a new 20% deduction for qualified business income (net of the deductible part of self-employment tax – line #27 per Form 1040).||This deduction also applies to pass-through entities, such as Partnerships and S Corps.|
|4||Tax rates will decrease in all tax brackets.||Bill’s highest tax bracket decreases from 25% in 2017 to 22% in 2018.|
|5||The child tax credit increases from $1,000 to $2,000 per qualifying child, and the phase-out threshold increases from adjusted gross income over $110,000 to $400,000.||Because of the lower phase-out threshold in 2017, Bill’s potential child tax credit of $2,000 was reduced to $0. In 2018, the increased threshold allows him to receive an increased credit of $4,000.|
With a decrease in a total tax of $12,775, Bill should be a happy man! Regardless of your circumstances, the 2018 changes bring about opportunities for new innovative tax planning strategies. Here at Acuity, innovation has been at the forefront of our culture from the start. Whether you’re looking for a CPA for the first time or considering a fresh start with a different firm, we would appreciate an opportunity to talk with you. The technology-driven, systematic approach to our brand new tax service will ensure you’re prepared to adapt to the changes of today and tomorrow.