With a stroke of a pen, the president signed the new tax reform law into existence. The law, which is formally known as the Tax Cuts and Jobs Act, takes effect on January 1, 2018. The act will mean millions of businesses and consumers will see their taxes change for the 2018 filing cycle. The law is widely known to reduce the corporate tax rate from 35 percent to 21 percent. Many individual income brackets change as well. So how can you save on your taxes for next year?
How You Can Save on Taxes
Taxpayers have the option of either itemizing their taxes or taking the standard deduction. The standard deduction is the first few thousand dollars a taxpayer makes that are not taxed. Taxpayers who itemize their taxes reduce their income subject to taxation by taking advantage of certain tax exemptions such as for mortgage interest, business expenses, childcare costs, etc. Your adjusted gross income is the income subject to taxation after the standard deduction or itemized deductions have been taken.
For many families that currently itemize their taxes, it may well be worth considering taking the standard deduction in 2018. This is because the TCJA doubles the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married filing jointly filing status. By some estimates, 94% of taxpayers may take the standard deduction. So one of the simplest ways a taxpayer may save on his or her taxes may be to tax the standard deduction and eliminate the added costs in itemizing your taxes. The standard deduction is In order to make the decision on whether to itemize or take the standard deduction, talk to your trusted tax professional.
The new tax law also doubles the estate tax exemption from $5.49 million to $11.2 million for single people and raises for married couples to $22.4 million. This means even fewer estates will be forced to pay an estate tax, few estates reach these thresholds. Estates that do will pay less in estate tax due to the rise in the exemption. This tax break, however, reverts in 2026 absent further Congressional action.
The tax reform also raises the Child Tax Credit from $1,000 to $2,000. Because it is a tax credit – not an exemption – tax filers who have no tax liability will also be able to claim this credit up to $1,400. Moreover, on the opposite end of the income spectrum, households earning up to $400,000 will receive the Child Tax Credit as opposed to the phase out at $110,000 for 2017.
Multi-generational families will also experience tax relief as the tax reform allows a $500 tax credit for each non-child dependent. This means that children who currently take care of elderly parents will receive this added tax benefit.
Start a Business
The tax reform has received widespread attention for its favorability to business and lowering the corporate tax rate from 35% to 21%. Although pass-through taxation entities, such as LLC’s, are likely still the most cost-effective vehicle for doing business for most entrepreneurs, the drop in corporate tax rate means some may benefit from forming a corporation. The 21% corporate tax rate is the lowest since 1939.
Although its corporations that see dramatic reductions in taxation, small businesses may also see some tax relief through the new 20% tax deduction which applies to non-service industry businesses with incomes below $157,500 for individuals and $315,000 for married filers.
Service industry businesses are those that rely principally on the reputation of the business and the services it provides. The 20% deduction applies to qualified business income and comes with certain restrictions. For these reasons, it’s important for LLC owners to contact their tax professional for careful tax guidance.
Buy a Rental Property
Another benefit of the new tax law is for taxpayers who own rental property. This highly technical tax break allows landlords to depreciate their assets at 25 years as opposed to 27.5 years for residential property. For commercial property, the depreciable timeline drops from 39 years to 25 years.
Save for Retirement
One final recommendation for saving on your taxes is by reducing your adjusted gross income (AGI). One of the best ways to do this is by contributing your retirement plan such as a 401(k) that is taken from your paycheck pre-tax. Because you are diverting money away from your AGI and into retirement savings, you will pay less in taxes.
The Tax Cuts and Jobs Act offers large tax breaks for corporate filers and moderate breaks for many individuals. While it eliminates and streamlines many deductions itemized filers previously enjoyed, it offers many new tax advantages for individuals and small business owners. Taxpayers looking to make the most of tax savings should consider all their options and contact their CPAs and attorneys for trusted advice.