Individual Provisions in Tax Reform Part I

Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.

Over the past several weeks, our blogs have been focused exclusively on how the tax reform is impacting businesses. As filing 1040’s is top of mind at this time of year, we thought we’d look at the changes that you will see on your 2018 tax return.

Ordinary Tax Rates

One of the highlights of 2018 tax reform for individuals is a reduction in ordinary income tax rates. Here’s how the ordinary tax rates have been reduced (the below amounts are based on taxable income):

Married filing joint return

Single Return

photo of 2018 single filing jointly tax rates | Cray Kaiser Ltd.

Although in general rates are falling 3-4%, your individual tax savings will be highly dependent on where your taxable income falls in the above tax brackets.

Capital Gain/Qualified Dividend Rates

The rules establishing preferential lower rates for long term capital gains and qualified dividend income have not changed, other than a slight adjustment for inflation. As such, the 0% rate applies to married couples with $77,400 or less in 2018 taxable income (singles with less than $38,700); the 15% rate applies to married couples with $479,000 or less in 2018 taxable income (singles less than $425,800); the 20% rate applies if income exceeds these amounts.

Alternative Minimum Tax

While we hoped the alternative minimum tax (AMT) would be eliminated as part of tax reform, AMT still applies to individuals, although with much higher exemptions.

Under prior law, individuals were allowed an AMT exemption that fully phased out at AMT income above $498,900 (for married couples filing jointly) or $337,900 (single taxpayers). In 2018, the phaseout doesn’t begin until AMT income exceeds $1,000,000 for a married couple, or $500,000 for single taxpayers. Although the AMT was not eliminated, we believe the number of taxpayers facing the AMT will be greatly decreased.

Click here to read about other individual provisions of tax reform that will actually reduce allowable tax deductions, offsetting some of the income tax savings that we would expect to see from the above changes. Please call us at 630-953-4900 with your questions.