The new tax bill has been signed into law and will have a direct impact on 2018. One of the main goals for the Tax Cuts and Jobs Act was to simplify your taxes and this will be the case for many Americans. According to the Wall Street Journal, “tens of millions of wage earners, retirees and young workers, especially in low- or no-tax states, will indeed find their taxes are much simpler. Millions of other self-employed professionals such as doctors, lawyers, accountants and architect, business owners and even workers in the gig economy – could get more complicated taxes.”
Since the bill went into effect, many of our clients have asked us how they should expect it to impact parents, seniors, and caregivers. The most significant impact, that is often heard, is the increase in the standard deduction to almost $12,000 per individual and $24,000 per married couple. We would like to share with you what we think are the top five other provisions and how we anticipate they could benefit you and your family.
1. The child tax credit is being doubled. Parents of minor children can look forward to a new tax credit coming their way! For 2018, parents of children who are seventeen years of age and under at the end of the year will receive double the existing tax credit of 2017. This means now for every child in the household there is a $2,000 credit instead of $1,000 per child. Further, if the family’s tax liability falls below zero, the family can receive the remaining amount on this credit in a refund.
2. There is new non-dependent child exemption. Under this portion of the bill, there is a $500 credit for every non-dependent child over the age of seventeen who you may still be helping. Many of our clients are members of The Sandwich Generation. They are helping a child with college tuition as well as helping their aging parents. For both parents and grandparents, who are helping out family members, this portion of the bill will provide a little extra tax relief in recognition of those services.
3. The medical expense deduction increase. According to the AARP, the new “law preserves the ability of millions of Americans with high medical expenses to deduct those costs from their returns. For the next two years, all taxpayers can write off health care spending that exceeds 7.5 percent of their income.” In fact, for 2019, this amount will raise from 7.5 percent to 10 percent of their annual gross income.
4. Increase and expansion on 529 plans. Under the new law, you will be able to invest in your child’s 529 plan and use the money not only for college but for elementary, middle and high school private education. This includes tuition and other qualified expenses. According to the NY Times, this will allow families to “do what’s known as ‘superfunding’ 529 accounts with a pile of money upfront. Then, they can pull out the $10,000 maximum each year to use for elementary and secondary school, until a child starts college.”
5. Deduction for pass through entities such as S-Corps and LLC’s. The new tax law will have a tremendous impact on S-Corps and LLCs. First, let us clarify any confusion on the different structures. The LLC structure allows your business to be taxed as a partnership or a company while an S-Corp allows most income and loss events to be passed directly to the shareholders who report this information on their individual tax returns. Both corporate and individual taxes have a progressive scale that has been up to roughly 39%. The tax bill has greatly reduced this burden. Going forward, corporations will have a flat tax rate of 21% and business income that passes through to an individual (through the S-Corp model) will be taxed at the individual amount less a deduction of up to 20%.
The tax bill continues to be something we will study over the next few months as the impact of many provisions are yet to be seen in practice. We will continue to monitor it and the impact it could have on you and your family. If you would like to learn more, please download our easy to read guide to the new tax laws by clicking here.
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