By Mikaeil Adane
Well it’s that time of the year where everyone is getting ready to file their taxes. Okay, maybe it’s a little early, but as they say, “early is on time.” So before you begin to plan on filing it is important to understand the changes on the tax code that may be applicable to your bottom line. In 2017 the United States Congress passed a tax reform, also known as the Tax Cuts and Jobs Act (TCJA). The TCJA is now the governing law for the 2018 tax year. This law has tweaked the standard deduction, itemization, and more. Before we jump into the changes let us start with the basics.
What are the Income Tax Brackets for 2018?
Taxable Rate for Single Filers:
| Rate | Taxable Income | Tax Rate |
| 10% | Up to $9,525 | 10% of taxable income |
| 12% | $9,526 to $38,700 | $952.50 plus 12% of the amount over $9,525 |
| 22% | $38,701- $82,500 | $4,453.50 plus 22% of the amount over $38,700 |
| 24% | $82,501 – $157,500 | $14,089.50 plus 24% of the amount over $82,500 |
| 32% | $157,501 to $200,000 | $32,089.50 plus 32% of the amount over $157,500 |
| 35% | $200,001 to $500,000 | $45,689.50 plus 35% of the amount over $200,000 |
| 37% | over $500,000 | $150,689.50 plus 37% of the amount over $500,000 |
Taxable Rate for Married, Filing Jointly:
| Rate | Taxable Income | Tax Rate |
| 10% | $0 to $19,050 | 10% of taxable income |
| 12% | $19,051 to $77,400 | $1,905 plus 12% of the amount over $19,050 |
| 22% | $77,401 to $165,000 | $8,907 plus 22% of the amount over $77,400 |
| 24% | $165,001 to $315,000 | $28,179 plus 24% of the amount over $165,000 |
| 32% | $315,001 to $400,000 | $64,179 plus 32% of the amount over $315,000 |
| 35% | $400,001 to $600,000 | $91,379 plus 35% of the amount over $400,000 |
| 37% | $600,001 or more | $161,379 plus 37% of the amount over $600,000 |
Taxable Rate for Married, Filing Separately:
| Rate | Taxable Income | Tax Rate |
| 10% | $0 to $9,525 | 10% of taxable income |
| 12% | $9,526 to $38,700 | $952.50 Plus 12% of the amount over $9,526 |
| 22% | $38,701- $82,500 | $4,453.50 plus 22% of the amount over $38,700 |
| 24% | $82,501 – $157,500 | $14,089.50 plus 24% of the amount over $82,500 |
| 32% | $157,501 to $200,000 | $32,089.50 plus 32% of the amount over $157,500 |
| 35% | $200,001 to $300,000 | $45,689.50 plus 35% of the amount over $200,000 |
| 37% | $300,001 or more | $80,689.50 plus 37% of the amount over $300,000 |
What is a Standard Deduction?
The income tax is the amount of money that the federal or state government takes from your taxable income. It is important to underline the difference between taxable income and total income. Taxable income refers to the portion of the income that is subject to taxes. In other word not all the income earned is taxed. Taxable income is usually smaller than the total income due to the deduction. This deduction is known as the standard deduction, which helps reduce your tax bill. You can only take a standard deduction however, if you do not itemize your deduction using Schedule A of Form 1040 to calculate your taxable income. Moreover, if you file married, filling separately you will not be able to qualify for the standard deduction.
You can only take a standard deduction however, if you do not itemize your deduction using Schedule A of Form 1040…
Now, let’s look into the changes that the TCJA has in store for us this filing year. One of the changes affected is the standard deduction amount. The standard deduction for individuals has increased to $12,000, $18,000 for head of household, and $24,000 for married couples filing jointly and surviving spouses.
The standard deduction for individuals has increased to $12,000, $18,000 for head of household, and $24,000 for married couples filing jointly and surviving spouses.
Child Tax credit is the second item affected by the tax reform. On 2018 each qualifying child is worth up to $2000. However, for the taxpayer to receive this benefit the child must be under the age of 17 at the end of the year. The refundable portion of this credit is limited to $1,400 and this amount will be adjusted for inflation.
If the parents are unmarried, it will be up to the parents to decide as to who would claim the child. Either parent may claim the child as a dependent if you cannot agree, but it is important to note that the dependency claim goes to the parent that reported the higher adjusted gross income on your separate tax return.
If you are getting ready to itemize some of your deductions this year, then you must pay attention to some of the changes that took place under the TCJA, because the tax reform has eliminated or restricted many itemized deductions beginning in 2018. I have listed below six itemized deductions that have been restricted or eliminated altogether.
- Casualty and theft losses
- State and local taxes
- Medical and dental expenses
- Tax prep fees
- Home mortgage interest
- Charitable giving.
Let us start with the first one.
Casualty and theft losses: In the old tax code you were able to claim itemized deductions for property loss that occurs unexpectedly that are not reimbursed by insurance to the extent, they exceed 10 percent of your adjusted gross income. And this include damage from fire, accidents, theft and vandalism and anural disasters. Under the new tax code, you can only claim personal casualty losses if the damage is attributable to a disaster declared by the president. The 10 percent threshold of AGI still applies.
State and local taxes (SALT): The new tax code places a $10,000 cap on state and local tax deductions combined. These taxes include state and local income or sales taxes, real estate taxes, and personal property taxes. This new cap is more felt if you live in high-tax areas.
Medical and dental expenses: The TCJA temporarily lowered the threshold for medical expense deduction from 10 percent to 7.5 percent of your adjusted gross income. This deduction is applicable for out-of-pocket health care costs. However, starting 2019, the threshold of 7.5 percent will jump back to 10 percent.
Tax prep fees and more: During the good old days, last tax year that is, there was such a thing called miscellaneous itemized deductions where you were able to deduct unreimbursed employee costs, tax preparation fees, investment expense and more so long as they exceeded 2 percent of adjusted gross income. Well, those days are long gone. Under the new tax code these tax breaks no longer exists.
Home mortgage interest: Prior to the TCJA, mortgage interest debt up to $1 Million was able to be itemized. And also, interest on home equity loan or line of credit were able to be deducted up to $100,000. Under the new tax code, you can claim a deduction for mortgage interest of up to $750,000 that is, the combined amount of loans you use to buy, build or improve your primary or second home. And as far as the interest on home equity loans and line of credits; they can only be claimed if the money were used to build or improve a home.
Under the new tax code, you can claim a deduction for mortgage interest of up to $750,000 that is, the combined amount of loans you use to buy, build or improve your primary or second home.
Charitable giving: Even though philanthropy is still rewarded, due to the higher standard deduction most people may not end up itemizing. Which in turn makes charitable deduction out of reach for those taxpayers.
Now that we covered some of the changes let us move on to the different status of filing taxes. For personal income tax there are five categories of filing status:
- Single: A person with no dependent and unmarried.
- Married, Filing jointly: Couples that are married and filing together jointly and claiming their kids (dependents) together. One thing to keep in mind when filing jointly is that the primary filer usually is the person that has the highest adjusted gross income.
- Married, Filing Separately: This is for couples who are married, but for whatever personal reasons decide to file their taxes separately. In this scenario both will not be eligible for standard deduction.
- Head of Household: To claim head of household you must have an address that is associated with you and the dependent who you are claiming must be living or have lived with you for at least more than half a year of the tax year.
- Qualified Widower: If your spouse died within a taxable year, you could file your taxes as a qualified widower and also be able to claim the income of your deceased spouse for that tax year only.
For a business owner, there is a variety of options available. However, the choice of these options must be first considered and made when registering the business at the secretary of state. Some of the choices are S-Corp or C-Corp (LLC, PLC, Inc).
What is the difference between S-Corp and C-Corp?
An S-Corp is considered as a pass-through entity, which means the business itself is not taxed instead, income is reported on the owner’s personal tax returns. Usually filing Schedule C form. Where as a C-Corp is treated as a separate taxable entity by the IRS. A C-Corp is taxed at the corporate tax level and then again at the personal income tax level when dividends or payments are made to the shareholder. Some say its “double taxation”.
What is the main difference between LLC and Inc?
The main difference between the two is: in Limited Liability, at the advent of bankruptcy lenders and creditors could come after your personal assets such as your home, cars etc., in other words your protection is limited. Whereas if the business is incorporated then the business is treated as its own entity and the liability is contained with the assets of the corporation. The other difference is that an LLC is usually registered as an S Corp. whereas an Inc. is usually register as C Corp for tax purposes.
If you are a business owner, you should first do a risk analysis before registering your business because it not only impacts the type of tax you pay, but also how personally liable you will be.
With respect to taxes it is advised that business owners should pay their taxes in quarterly bases to avoid a lump sum payment at end of the tax year. It also helps greatly in organizing your ledger while reducing the headache of your accountant. The most common mistake people make besides waiting till the last minute to organize their tax record is that small business owners, especially when starting out, tend to mix their personal and business expenses lumped together. This makes things complicated when trying to calculate deduction, profit and loss. It is imperative to note the important of separating business and personal income and expenses reports. Having a separate boundary between the two will help in case of an audit as well.
Before I conclude this article, I get asked a lot on how to off set stock investment losses when filing taxes? To help the reader to delve into the answer in depth, I will post a link below. But to give you a shorter version of the answer: you can use a capital loss as an offset to ordinary income, up to $3000 per year. To deduct your stock losses, you have to fill out Form 8949 and Schedule D for your tax return.
Mikaeil Adane is the CEO of Admas Financials, LLC based in the state of Georgia. Mikaeil is a financial professional who specializes in tax law and taxation. To learn more you can reach Mikaeil at mike@taxshieldservice.com.
