Just a friendly reminder, if you need to pay US federal estimated taxes, 2017 4th quarter payment is due on or before January 15, 2018.
To help you plan for 2018 and understand the tax law changes, here is a brief summary that will take effect beginning in 2018 under the major piece of tax legislation called the Tax Cuts and Jobs Act (the Act) signed into law by President Trump on December 22, 2017.
Rate changes for individuals. Individuals are subject to income tax on “ordinary income,” such as compensation, and most retirement and interest income, at increasing rates that apply to different ranges of income depending on their filing status (single; married filing jointly, including surviving spouse; married filing separately; and head of household). Currently those rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
New rates. Beginning with the 2018 tax year and continuing through 2025, there will still be seven tax brackets for individuals, but their percentage rates will change to: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
Bottom line. While these changes will lower rates at many income levels, determining the overall impact on any particular individual or family will depend on a variety of other changes made by the Tax Cuts and Jobs Act, including increases in the standard deduction, loss of personal and dependency exemptions, a dollar limit on itemized deductions for state and local taxes, and changes to the child tax credit and the taxation of a child’s unearned income, known as the Kiddie Tax.
Capital gain rates. Three tax brackets currently apply to net capital gains, including certain kinds of dividends, of individuals and other noncorporate taxpayers: 0% for net capital gain that would be taxed at the 10% or 15% rate if it were ordinary income; 15% for gain that would be taxed above 15% and below 39.6% if it were ordinary income, or 20% for gain that would be taxed at the 39.6% ordinary income rate.
The Act, generally, keeps the existing rates and breakpoints on net capital gains and qualified dividends. For 2018, the 15% breakpoint is: $77,200 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $51,700 for heads of household, and $38,600 for other unmarried individuals. The 20% breakpoint is $479,000 for joint returns and surviving spouses (half this amount for married taxpayers filing separately), $452,400 for heads of household, and $425,800 for any other individual (other than an estate or trust).
Important: These new individual income tax rates will not affect your tax on the return you will soon file for 2017, however they will almost immediately affect the amount of your wage withholding and the amount, if any, of estimated tax that you may need to pay.
A related change is that the future annual indexing of the rate brackets (and many other tax amounts) for inflation, which helps to prevent “bracket creep” and the erosion of the value of a variety of deductions and credits due solely to inflation, will be done in a way that generally will recognize less inflation than the current method does. While it won’t be very recognizable immediately, over the years this will push some additional income into higher brackets and reduce the value of many tax breaks.
Other changes affecting individuals: The Act will have the following impact to individual clients beginning 2018.
- Increased standard deduction: Standard deduction for married couples filing jointly increases to $24,000, for single filers increases to $12,000 and to $18,000 for head of household filers.
- Suspension of personal exemption: Personal exemption would be repealed through 2025.
- Suspension of home equity loans: Home equity loan interest deduction would be repealed.
- State and local taxes deduction: individuals would be allowed to deduct up to $10,000 ($5,000 for married taxpayers filing separately) in state and local income or property taxes
Corporate income tax rate drop. C corporations currently are subject to graduated tax rates of 15% for taxable income up to $50,000, 25% (over $50,000 to $75,000), 34% (over $75,000 to $10,000,000), and 35% (over $10,000,000). Personal service corporations pay tax on their entire taxable income at the rate of 35%. (The benefit of lower rate brackets was phased out at higher income levels.)
Beginning with the 2018 tax year, the Act makes the corporate tax rate a flat 21%. It also eliminates the corporate alternative minimum tax.
Upcoming Event: In connection with Tariq Dennison at GFM Asset Management, we will be holding an informative presentation “2018 US Tax Changes and Your Financial Plan” on Monday evening January 22, 2018 at 6:30 PM with our strategic partner Kurt Kawafuchi joining us. https://www.eventbrite.hk/e/2018-us-tax-changes-and-your-financial-plan-tickets-41568642930
I hope this information helps you understand these changes. Please contact us if you wish to discuss how they or any of the many other changes in the Act could affect your particular tax situation, and the possible planning steps you might consider in response to them.