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The Tax Cuts and Jobs Act passed at the end of 2017, implementing a suite of changes effective for tax year 2018 and beyond. Since most changes took effect January 1, 2018, individuals who submit a return at the beginning of 2019 might be seeing the effects of these changes for the first time. There are a few changes for tax year 2019, too.
Our friend Lane Kawaoka of SimplePassiveCashflow.com reviewed the new tax code and contributed his observations as a real estate investor to the ATLAS Workbase community. Here are a few of his takeaways:
- The big picture: “For the most part things got simplified a little bit,” said Lane. “A lot of the smaller deductions got taken away and got replaced with a higher standard deduction, so in that respect, it’s a little bit of a wash for regular people.”
- Goodbye, entertainment deduction: “Now when we go out and we have our meetings with our spouse or meeting with partners or colleagues we can’t write off the amount, which is a little annoying, but it’s small potatoes at the end of the year.”
- Long-term real estate depreciation is an immediate deduction for big investors: “The new tax laws have kind of allowed us real estate investors to do a cost aggregation [on a real estate building],” Lane explained. “You get an engineer involved and the engineer categorizes all the little components of that building. Certain things you’re able to write off all in year one, so instead of depreciating it over 30-40 years, a lot of things you can take in the first year or the first five years, [so] you get the tax deduction a lot sooner.” This, said Lane, allows for more investment: “If we save 100 grand on taxes today, we can go invest that next year.”
Lane notes that this isn’t really an accessible option for smaller investors—it can cost several thousand dollars to get the cost estimates. But for $10 million apartment buildings, it increases an investor’s ROI. “I don’t have those types of problems, unfortunately.”
We’ve detailed some specific changes for 2018 and 2019 below—although our observations are not a replacement for advice from a qualified tax professional.
2019 Tax Changes for Individuals
2019 Standard Deduction
For tax year 2018 (filed in 2019):
- Single: $12,000.
- Head of household: $18,000.
- Married, filing jointly: $24,000.
For tax year 2019 (filed in 2020):
- Single: $12,200
- Head of household: $18,350
- Married, filing jointly: $24,400
Other Deduction Changes for 2019: Medical Expenses, Mortgages, and More
Tax reform effective as of tax year 2018 and effective until 2025 made changes to many common deductions:
- Local tax deductions: State and local tax deductions are capped at $10,000
- Alimony deductions: For divorce or separation agreements reached after December 31, 2018, alimony payments are no longer deductible.
- Moving expense deduction: The deduction that previously allowed writeoffs for job-related moves of more than 50 miles is eliminated starting tax year 2018
- Mortgage interest deduction: Limited to interest on up to $750,000 of debt on a primary or secondary home, or $375,000 each for married people filing separately, for mortgages taken out after December 15, 2017
- Home equity interest deduction: This deduction was previously limited to interest on $100,000 of debt; now, it’s limited even further to just major home improvements within the debt limit
- Casualty and theft deduction: Limited to federally-recognized national disasters only.
- Medical expenses: Deductible if more than 7.5% of adjusted gross income for tax year 2018 (no change)—or deductible if more than 10% of adjusted gross income from 2019 through 2025.
- Pease itemized deduction phaseout: Eliminated starting in tax year 2018
The tax changes also eliminated several items that were previously deductible in excess of 2% adjusted gross income:
- Tax preparation fees
- Investment advisory fees
- Unreimbursed work expenses, like travel, parking, or meals
- Depreciation on phone or computer required for work
- Investment expenses
- Job search expenses
2019 Alternative Tax Minimums
- Alternative minimum tax-exempt income thresholds increased: As of tax year 2018, $70,300 exemption for a single person or $109,400 for a married couple filing jointly.
- Alternative minimum tax-exempt income phaseouts increased: Households are no longer eligible to exclude the alternative minimum tax when income reaches $500,000 (single) or $1 million (married filing jointly).
2019 Child Tax Credit: How Much Do I Get For Dependents?
Beginning in tax year 2018, the child/dependent tax credit is $2,000 per qualifying child under 17. This is an increase from $1,000 in tax year 2017.
The credit phases out for those with a modified adjusted gross income of $200,000 (single) or $400,000 (married filing jointly).
2019 Education Funding Tax Changes
529 accounts can be used to fund up to $10,000 of K-12 education, tuition, and materials per beneficiary per year.
2019 Tax Penalty Changes
- Obamacare tax penalty: For tax year 2018, the Affordable Care Act tax penalty for not having coverage is still in effect: $695 per individual (or a maximum of $2,085 per household) or 2.5% of household income, whichever is greater. In tax year 2019, the penalty will be eliminated.
- Marriage tax penalty: Some tax changes kick in for tax year 2018 that will reduce the tax burden for many married couples.
What Are the New Tax Brackets for 2019?
For both tax years 2018 and 2019, there are seven tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The tax brackets themselves, however, differ for 2018 and 2019, and depend on whether you’re filing as a single person, as a married couple filing jointly, or a married couple filing separately. Forbes has detailed breakdowns for both tax year 2018 (filed in 2019) and tax year 2019 (filed in 2020).
2019 Tax Code Changes for Pass-Through Entities
U.S.-based pass-through entities, such as LLCs, S corporations, partnerships, sole proprietors, real estate investors, trusts, REITs, and others are experiencing some changes from tax year 2018 through 2025:
- A 20% deduction on pass-through income is allowed on individual income tax return.
- This deduction doesn’t apply for higher incomes: Phaseout begins at $157,500 for a single filer or $315,000 for married couples filing jointly.
- Non-service businesses who exceed the phaseout amount default to the greater of two options:
- 50% of W-2 wages reported for the qualified business, or
- 25% of W-2 wages reported, plus 2.5% of “the unadjusted basis immediately after acquisition of all qualified property”—e.g., a rental building.
2019 Tax Code Changes for Corporations
The biggest change for corporate taxes is a permanent flat tax of 21% instead of graduated tax brackets, effective January 1, 2018. Corporations that pay taxes on a fiscal rather than calendar year may have already paid taxes with a blended rate.
2019 Tax Code Changes for Foreign Profits
Beginning in 2018 we shifted to a territorial tax system, so profits made abroad work differently than they did before: Foreign profits are exempt from domestic taxation, and profits coming back to the U.S. are taxed at a lower rate.
2019 Estate Tax Changes
Effective January 1, 2018 through December 31, 2025, the amount of money exempt from gift or estate tax is $11 million for a single filer or $22 million for married couples filing jointly—nearly double what it was in 2017.
Other 2019 Tax Changes
A few miscellaneous tax changes are taking effect as of tax year 2018—but apply to 2019, too:
- The 50% entertainment deduction is no longer allowed—although meals are still deductible at 50%
- The tax-free parking/transit subsidy is no longer allowed
- 100% write-off of qualified, fixed assets
Previous version of this article published on January 2018: 2018 Tax Changes:
Here are my big takeaways from the list of 2018 Tax changes:
- Standard deduction and personal exemption combined and seems like everyone is getting more… so its a wash IMHO.
- Less deductions for those who don’t have a business like real estate investments. Sigh… it just gets harder and harder for working professionals.
- Sorry to those paying Alimony… Yay to more kids though although we all know that’s a huge net negative unless you put them to work in the farm
- Mortgage interest capped, this is to pay for general cuts across the board. Smart investors will find a away to make their home an above the line business expense.
- 20% pass through on personal return from business yay!
- Estate tax limits increases… must be a favor for some old poker buddies?
- Lower corporate tax to hopefully re-patronize companies who ran away from USA.
I went down the following list and updated my personal spreadsheets to calculate my tax liability. You should too… just Don’t hand it over to your CPA!
2018 Tax Changes for INDIVIDUALS
Effective Date: 1/1/18. Expires 1/1/26.
Real Estate Taxes on Primary Home plus State & Local Income Taxes Capped at $10,000.
What is the New Standard Deduction for 2018?
- Single: $12,000.
- Head of Household: $18,000.
- Married Filing Join: $24,000.
2% Itemized Deductions Eliminated
- Tax Preparation Fees.
- Unreimbursed Business Expenses.
- Continuing Education Expenses.
- Licensing Fees.
- Investment Expenses.
Effective 1/1/19 Alimony No Longer a Deduction to Paying Ex-Spouse and No Longer Income to Recipient Ex-Spouse.
Mortgage Interest Deduction
Limited to $750,000 for Primary and Secondary Home New Mortgages Obtained After 12/15/17.
Home Equity Interest Deduction on $100,00
Only Allowed For Home Improvements.
Real Estate Tax Deduction for Vacation Homes
No Longer Allowed.
Moving Expense Deduction
No Longer Allowed.
Casualty Loss Deduction
No Longer Allowed Except in Presidential Declared Disaster Areas.
Medical Expense Deductions
Adjusted Gross Income Threshold Reduced from 10% to 7.5% But Only For 2018 & 2019.
Alternative Minimum Tax Exempt Income Thresholds Increased
From $54,300 (Single)/$84,500 (Married Filing Joint) to $70,300 (Single)/$109,400 (Married Filing Joint).
Alternative Minimum Tax Exemption Phaseouts Increased
From $120,700 (Single)/$160,900 (Married Filing Joint) to $500,000 (Single)/$1 Million (Married Filing Joint).
Note: This means that if your income exceeds the $500,000 or $1 million phaseout amount, you are no longer eligible to exclude $70,300 or $109,400 from Alternative Minimum Tax.
2018 Child Tax Credit – How much do you get for dependents on taxes 2018?
Increases From $1,000 to $2,000 Per Child, For Children Under Age 17.
Also, This Credit is Refundable Up To $1,400 If You Quality (Meaning – You Meet The Low Income Tests).
From $75,000 (Single)/$110,000 (Married Filing Joint) to $200,000 (Single)/$400,000 (Married Filing Join).
529 Plans Change
You Are Now Allowed to Use $10,000 Per Year to Pay For K-12 Education Tuition, Materials and Tutoring.
Obamacare Penalty is Eliminated Effective 1/1/19.
Removed From All Tax Brackets.
What are the new Tax Brackets for 2018?
Income Tax Brackets Will Now Be Adjusted For Inflation Using a Much Slower Measure Called “Chained Consumer Price Index For All Urban Consumers.”
2018 Tax Code Changes for PASS THROUGH ENTITIES
Effective Date: 1/1/18. Expires 1/1/26.
U.S.-Based LLCS, S Corps, Partnerships and Sole Proprietors, Real Estate Investors, Trusts and Estates, REITs and Qualified Cooperatives Tax Update 2018
- 20% Deduction Allowed On Individual Income Tax Return. This 20% is Applied to Your Share of the Taxable Income From a Pass Through Entity.
- Deduction is Phased Out if Your Income is Too High: Phaseout Begins at $157,500 (Single)/$315,000 (Married Filing Joint).
- Non-Service Businesses Who Exceed The Phaseout Amount Default to This Limitation:
- 50% x Wages Reported On Pass Through Business or
- 25% x Wages Reported On Pass Through Business Plus 2.5% x Tax Basis of Depreciable Property.
2018 Tax Updates for CORPORATIONS
Effective 1/1/18. Permanent – Meaning No Expiration Date.
21% Flat Tax Replaces Graduated Tax Brackets.
Territorial System Replaces World-Wide System
All Foreign Profits of U.S.-Based Corporations No Longer Taxed Effective 1/1/18.
Pre-1/1/18 Untaxed Foreign Profits of U.S.-Based Corporations Automatically Subject to Corporate Tax, Even if Those Foreign Earnings Remain Held Oversees.
Tax Rates on “Old Foreign Profits”
- 8% x Untaxed Foreign Profits Invested in Illiquid Assets Plus
- 15.5% x Untaxed Foreign Profits Invested in Cash and Cash Equivalents.
2018 ESTATE TAX Updates and Changes
Estate Exemption Increased
From $5,490,000 (Single)/$10,980,000 (Married Couples) to $11,000,000 (Single)/$22,000,000 (Married Couples), Effective 1/1/18.
OTHER Tax Updates for 2018
50% Entertainment Deduction No Longer Allowed, Effective 1/1/18.
Tax-Free Parking/Transit Subsidy No Longer Allowed, Effective 1/1/18.
100% Write-Off of Qualified Fixed Assets, effective 1/1/18.