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To our Clients and Friends,

The President has signed the biggest tax reform law in over 30 years. When you file your 2018 tax returns -about a year from now - your tax return will look very different. Since most changes don’t happen until then, we have some time to learn about the changes and plan for next year. This letter attempts to address some of the biggest changes that may affect you.

Tax rate changes. Both individual and corporate rates have changed. The maximum individual rate is reduced to 37% and the corporate rate is now a flat 21%.

Standard deduction increases. For 2018 tax returns, the standard deduction is increased to $24,000 for married couples filing a joint return, $18,000 for head – of –household filers, and $12,000 for all other taxpayers. In addition, an additional standard deduction is available for the elderly and blind.

Increased Child Tax Credit, new Dependent Credit, and removal of personal exemptions. The child tax credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non – child dependent can now receive a new credit of $500. However, you will have no exemption credit or deduction for yourself, your spouse, or your dependents as personal exemptions were removed as part of the new tax law. The phase-out thresholds for these credits are drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). The credits are fully phased out for married taxpayers filing a joint return when their adjusted gross income reaches $440,000 ($240,000 for all others).

Disappearing deductions. Beginning with the 2018 tax year, you will no longer be able to deduct:

  • State income tax and property taxes above $10,000 per year in total;
  • Moving expenses (with an exception for certain military);
  • Employee business expenses such as mileage, travel, entertainment, home office expenses, union dues, tax preparation fees, and investment fees, among others;
  • Mortgage interest beyond interest on $750,000 of acquisition debt, if you purchase a new home; and
  • Mortgage interest paid on equity debt (this is no longer deductible for any taxpayers).

Some new benefits for individuals. Some of the new benefits include:

  • The medical expense AGI threshold will temporarily drop to 7.5% of AGI for 2017 and 2018;
  • The AMT threshold is increased, so fewer middle-income taxpayers will be subject to AMT;
  • The estate tax exclusion has nearly doubled, to $10 million (adjusted for inflation); and
  • The annual gift tax exclusion remains the same ($14,000 for 2017 and $15,000 for  2018), but the maximum rate on gifts is 35%.

Small business benefit. Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity. The rules are incredibly complex but there is a lot of planning that can be done to maximize this deduction for you.

The changes discussed in this letter are some of the most common changes. Keep in mind that all states have their own unique set of rules to consider and, as such, many of the strategies employed to reduce Federal taxes may not be applicable to your state income taxes.

Wishing you a Happy New Year,

Team Tax Guru

Tax Year 2017-18