2018 Tax Reform: Learn what is New and How to Prepare for It

The time has come to review your year-end plans, and most especially this year comes with a twist, so be sure to include the odds of the looming tax changes.

Both the House of Representatives and the Senate version, though maybe be differing in some details has also lots of similarities. One thing is certain, it would revise tax brackets and pare back some tax breaks. All of these changes will apply to 2018 tax year moving forward. There will still be negotiations in the coming weeks before a final legislation get signed by the president.

The Senate wanted temporary individual cuts, such as lower tax rates, higher standard deductions and child credit, repeal AMT, tax break for the self employed and pass-through entity owners. All these provisions were proposed to be repealed by 2025.

Both the House and the Senate would like to raise the standard deductions, nearly doubling them. $24,000 for married filing joint returns and $12,000 for single filers. But, the downside is that both also want to do away with the personal exemption credit which are currently $4,050 per person on the tax return.

The Senate is also proposing an increased child tax credit of $2,000 up from $1,000 in prior years. The House proposed child tax credit is $1,600. The child tax credit will phase out for taxpayers on higher income level.

The House of Representatives has four tax rates for individuals, ranging from 12% to 39%. The Senate is proposing seven tax rates starting at 10% and capping at 38.5%.

As regards to the state and local tax write off, there is a big disagreement. The Senate wants to completely remove it, while the House wants to cap real property taxes at $10,000.

Also, not final yet would be home mortgage interest deduction. The House wants to remove the break for second homes and lower the ceiling of home acquisition indebtedness to half a million dollars. There is no version of this bill in the Senate.

Medical deductions is also at issue. The House wants to totally remove it while the Senate wants to keep it. 

As regards to health care: the Senate decided to repeal the mandate for everyone to have health insurance and the House most likely would go along.

And now.. are you ready for the question: how can we better prepare to mitigate the impact of all these proposed changes? 

First, most of us can benefit from this old strategy, "DEFER INCOME AND ACCELERATE DEDUCTIONS". Especially with the the upcoming tax bracket changes.

With a number of itemized deduction items at risk of being eliminated, it would be best to use it in 2017 while you still can instead of losing it altogether in 2018.

  1. Residential real, State and local income taxes: prepaying in 2017 your real state taxes due for 2018 will let you claim more deduction in 2017.
  2. If you prepay your January 2018 mortgage payment in December 2017, you can deduct the interest portion in tax year 2017.
  3. As regards to charitable donation deduction, this write-off is here to stay, but it may not be as valuable in 2018 if the standard deduction is raised significantly. You can accelerate your donation by charging taxes or mailing your check by December 31, 2017.
  4. Medical expenses deduction, the House wants to remove it, while the Senate want to keep it; if your 2017 medical bills would exceed 10% of your adjusted gross income, you will be better off to pay your elective procedures before the year end of 2017.

Additional Tax Planning Tips:

  1. If you have some “losers” stocks investments you want to dump, consider selling them. Capital loses can offset capital gains up to $3,000 of other income, and the excess losses can be carried forward to offset future capital gains.
  2. Donate long-term appreciated stock or mutual fund shares directly to charity to deduct its full value. For a property that has fallen in value, capital loss would be wasted if you directly donate it to charity. It would be best to sell the property, and benefit from the capital loss on your tax return, then donate the proceeds to charity.
  3. You can avoid the additional 3.8% Net Investment Income Tax by purchasing Municipal bonds with interest free tax treatment.

Again, all these proposed tax changes are still under negotiation and I will give updates should there be any changes in the future. Feel free to contact us if you have any questions or concern.

Happy Holidays to all!


Oscar B. Antonio, EA


[2017 issue: 1]