President Trump signed the new tax bill on December 22nd, 2017 passing the largest tax update since 1986. With a bill this large there is going to be a lot of regulation to be released in 2018 and we are all anxiously awaiting! While it all goes into effect for the 2018 tax year it still had some effect on planning for the 2017 tax year and has created a need for conversations with your tax provider to plan ahead for the 2018 tax year. However, with many of the new changes tax providers are waiting on official regulations before we can actually advise on what was meant by the new law. But there are things we do know for sure that take effect 1/1/18.
There will be new tax brackets and rates for 2018. The new tax rates will be 10%, 12%, 22%, 24%, 32%, 35%, and the top bracket is 37% for over $500,000 for singles, $600,000 for those filing married joint. This is a drop from 39% for over $415,050 for single and $466,950 for those filing married joint. As taxpayers look into rollovers, distributions, and other changes in income they are advised to take a look at the new brackets.
A second major change is the standard deduction. The deductions are now: $24,000 for married filing joint, $18,000 for a head of household, and $12,000 for all other taxpayers. Another important piece to this is the personal exemption is effectively suspended so it is not as great a thing as it seems on the forefront The personal exemption for 2017 is $4,050. The change in the standard deduction caused some very late-year tax planning changes and had many rushing to prepay their 2018 Property taxes so they could deduct them on their 2017 tax return. After all the rush the IRS ruled these taxes could only be deductible if the county actually had a bill for them so this will be handled on a county by county basis.
A few other changes in this same area that take effect after the 12/31/17 tax year:
- The over limitation on itemized deductions is removed
- Home mortgage interest deduction is limited to the first $750,000 in debt ($1 million in debt acquire prior to 12/16/17)
- $10,000 deduction limitation on state and local taxes not paid or accrued in a trade or business
- For cash donations to qualifying charities, the income limit has increased to 60% (from 50%)
- Miscellaneous itemized deductions subject to the 2% floor have been suspended.
- These include appraisal fees, certain IRA fees, and some job expenses.
- Employers should look at having accountable plans if they have employees that deduct home office expenses.
The child tax credit for dependents under the age of 17 has doubled to $2,000 per qualifying child. Taxpayers may also qualify for a $500 nonrefundable credit for qualifying dependents other than qualifying children. There was not a change to the definition of dependents. In order to receive the child tax credit, the taxpayer must include a Social Security number for each qualifying child.
The Kiddie tax laws had a major change that may affect how trusts and estates are treated. Under prior law, the Kiddie Tax was a huge advantage because the income would be taxed at the taxpayer’s (kid’s) tax rate. Trusts and Estates would be set up so the income would be distributed to the child and taxed at the lowest tax bracket. The House and Senate recognized the taxes they were missing out from this and decided that now the unearned income from the trusts and estates will now be taxed according to the brackets applicable to the trust and estate. Any earned income (wages) will be taxed according to the bracket the child is actually in.
For tax years prior to 1/1/18 Alimony payments have been deductible on the payer’s return and included as income on the recipient’s tax return. For all agreements that are executed after 12/31/18, this will no longer be the case. Alimony and separate maintenance payments are not deductible by the payer. The treatment of child support is not changed.
Moving expenses in relation to a job change will no longer be deductible after 1/1/17. This change does not affect members of the armed forces on active duty that move pursuant to a military order.
A very big change that is creating a lot of confusion and discussion is the exclusion of 20% of qualified business income from a partnership, S corporation, or sole proprietorship. This whole section is quite complicated and subject to regulations that tax preparers and advisors are anxiously waiting for. There are several exemptions, limitations, and other stipulations that it would be hard to go into detail in this article. So my advice is this: if you are a business owner talk to your tax preparer and advisor. A lot of this will be a case-by-case situation and there are many questions that are going to be answered with “it depends”. For some, this will be a tax benefit and for others, this will not make a difference. The limitations involve income (wage and K-1 income) and also what industry the income is from. Before you rush out to make changes to your ownership and business type take the time to sit down and go over the numbers with a professional.
Net Operating Loss limitations have been added to the law for taxable years beginning after 12/31/17 and before 1/1/26 for taxpayers other than corporations. Excess business losses of a taxpayer other than a corporation are not allowed for the taxable year. These losses are carried forward and treated as part of the taxpayer’s NOL carryforward in subsequent taxable years. NOL carrybacks of post-2017 tax years are no longer allowed.
Minnesota State legislature signed their 2017 tax bill into law and goes into effect for the 2017 tax year. The new bill offers more opportunities for tax savings for Minnesota residents, with some added paperwork and forms of course.
The first one that is really exciting is the opportunity for a tax credit or subtraction when setting up a 529 College Savings Plan. In the past, there were not any tax savings for setting these up until the college student began drawing on them. The student was able to take distributions to use specifically for college (tuition and textbooks) and not pay tax on the distribution. Now Minnesota is offering an opportunity for the contributor to get a tax benefit. The taxpayer has the option of taking up to a $500 credit or subtracting up to 50% of the total contribution. Another great thing about this credit is the benefactor does not need to be a dependent or a Minnesota resident and the plan does not need to be a Minnesota plan. Another option is the student can contribute to their own 529 plan and claim credit as long as they are not claimed as a dependent on another return.
Another tax benefit that Minnesota is offering for the 2017 tax year is the subtraction of taxable Social Security income. Once a taxpayer has a certain amount of other income (this includes wages, Required Minimum Distributions, Interest, and any other income) up to 75% of Social Security Income can become taxable at the federal level. The subtraction is up to $4,500 if filing married joint, $3,500 if filing single or head of household, $2,250 if filing married/separate. This subtraction does phase out once the taxable income exceeds thresholds, but should result in savings for most taxpayers.
Are you a teacher considering earning your master’s degree? There is an opportunity for a tax credit here also. The credit is available to any teacher beginning the Master’s program after June 30th, 2017, and is available once the degree is earned. The degree must also be in the core content directly related to the teacher’s licensure field. The credit is equal to the lesser of $2,500 or the cost of tuition, fees, books, and instructional materials.
Minnesota is also now offering a credit for student loan payments. The credit is available to Minnesota residents only. The nonrefundable credit is limited to the least of $500, earned income for the year, and a figure that is based on amount of interest paid or actual loan payments made. If you are filing married jointly each taxpayer can take the credit and it is claimed on the new MN Form M1SLC.
Are you a Minnesota resident paying taxes to Wisconsin? Great news – there is a credit available for this now. Another item was passed for taxpayers who are having issues in determining residency. One item that was used a lot was the location of the Taxpayer’s CPA, attorney, or financial advisor and the state has just passed into law this will no longer be used as a determining factor. This is a great victory for many people who chose to move but wish to keep the same professional advisors.
There were also changes made to the treatment of installment sales of pass-through entities in Minnesota and the acceleration of gain. If you are an owner of an S-Corporation or partnership and considering a sale you are advised to meet with your tax advisor to get advice on how to best take advantage of this or avoid the extra tax.
For decedents passing, after December 2016 the estate exclusion is increasing to $3 million by 2020 in $300,000 increments beginning in 2017. Minnesota residency of the decedent is a factor here as well.
Beginning in the tax year 2018 Minnesota is now offering credits on the sale or rental of agricultural equipment. There are some hoops to jump through to qualify for this credit but proper planning should make it easier to attain. One important thing to know right away is the farmer does not qualify for the credit if the sale is to a related party, unfortunately.
The Minnesota legislature has released all forms and information to help guide tax preparers and taxpayers through this process. There are many other changes regarding business structures, treatment of income, and depreciation that have been made or stayed the same on the federal level. You are encouraged to set up a time with your tax preparer or advisor to sit down and talk about these before making any changes. Between the internet and the news, there is a lot of information out there, some of it incorrect, misleading, and outdated and can cause confusion. As a CPA I and the many others around here we are all doing our best to keep up with the latest news and regulations for our clients.