By Mark Wright, OD, FCOVD,
and Carole Burns, OD, FCOVD
Jan. 24, 2018
New tax legislation was just signed into law–and accountants are working overtime to advise taxpaying citizens and business owners on its impact.
The following are key changes in the new tax code might impact–and even benefit–practice owners.
PASS-THROUGH DEDUCTION
The big news with the 2017 tax law is the pass-through deduction. It applies to income earned by sole proprietorships, partnerships, LLCs, and S corporations. If you own one of these entities, you will be able to deduct 20 percent of the pass-through income. If your practice generated $100,000 in profit, you can deduct $20,000, which reduces your tax exposure to $80,000. The $80,000 is then taxed instead of the $100,000 at the ordinary income tax rates.
But that is not the whole story. Phase out income limits apply to “professional services” business owners such as lawyers, doctors, and consultants. The phase out income limits are set at $157,500 for single filers and $315,000 those filing a joint return. At those levels of income, the pass-through deduction begins to phase out.
You can read more about pass-through deduction here [https://www.fool.com/taxes/2017/12/09/what-is-pass-through-income-and-why-is-it-so-impor.aspx] and here [https://www.nytimes.com/interactive/2017/12/20/us/politics/small-business-tax-cut-pass-throughs.html].
PERSONAL TAX RATES
Here are the tax brackets that were scheduled to take effect in 2018 if there had been no new tax legislation.[i]
| OLD Marginal Tax Rate | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
| 10% | $0-$9,525 | $0-$19,050 | $0-$13,600 | $0-$9,525 |
| 15% | $9,525-$38,700 | $19,050-$77,400 | $13,600-$51,850 | $9,525-$38,700 |
| 25% | $38,700-$93,700 | $77,400-$156,150 | $51,850-$133,850 | $38,700-$78,075 |
| 28% | $93,700-$195,450 | $156,150-$237,950 | $133,850-$216,700 | $78,075-$118,975 |
| 33% | $195,450-$424,950 | $237,950-$424,950 | $216,700-$424,950 | $118,975-$212,475 |
| 35% | $424,950-$426,700 | $424,950-$480,050 | $424,950-$453,350 | $212,475-$240,025 |
| 39.6% | Over $426,700 | Over $480,050 | Over $453,350 | Over $240,025 |
This next chart gives the current tax legislation brackets under the 2017 law.[ii]
| NEW Marginal Tax Rate | Single | Married Filing Jointly | Head of Household | Married Filing Separately |
| 10% | $0-$9,525 | $0-$19,050 | $0-$13,600 | $0-$9,525 |
| 12% | $9,525-$38,700 | $19,050-$77,400 | $13,600-$51,800 | $9,525-$38,700 |
| 22% | $38,700-$82,500 | $77,400-$165,000 | $51,800-$82,500 | $38,700-$82,500 |
| 24% | $82,500-$157,500 | $165,000-$315,000 | $82,500-$157,500 | $82,500-$157,500 |
| 32% | $157,500-$200,000 | $315,000-$400,000 | $157,500-$200,000 | $157,500-$200,000 |
| 35% | $200,000-$500,000 | $400,000-$600,000 | $200,000-$500,000 | $200,000-$300,000 |
| 37% | Over $500,000 | Over $600,000 | Over $500,000 | Over $300,000 |
The new tax legislation ends up with a seven-bracket structure like the old legislation. Two key points to note are that the marginal tax rate is reduced with the new law for five of the seven brackets and that the dollar amounts for five of the seven brackets were changed.
How does this affect people? Let’s look at two examples.
- For a single person with a taxable income of $82,500, under the old tax law, the marginal tax rate was 25 percent. Under the new tax law, the marginal tax rate is 24 percent.
- For a married couple filing jointly with a taxable income of $164,000, under the old law the marginal tax rate was 28 percent. Under the new tax law, the marginal tax rate is 22 percent.
The other changes that come into play with the new tax law are:
- If you are married couple filing jointly making under $400,000, the marriage penalty is eliminated.
- The standard deduction approximately doubled for everyone, but the personal exemption was eliminated. For most people this is a better deal with the new tax law.
- The Child Tax Credit (for qualified children under age 17) is doubled from $1000 to $2000.
- The bill expands the use of money saved in a 529 college savings plan to include levels of education other than college.
- For mortgages taken out after December 15, 2017, the mortgage interest deduction was reduced from $1 million to $750,000. Older mortgages are grandfathered in.
- The charitable contribution deduction was increased to 60 percent of income (up from a 50 percent cap).
- Donations made to a college in exchange for the right to purchase athletic tickets is no longer be deductible.
- The state and local taxes deduction is limited $10,000 (including income, sales, and property taxes).
- The Affordable Care Act Penalty for those who do not buy health insurance can still be assessed in 2018, but it goes away in 2019.
- Several deductions in place under the old law disappear under the new tax law. The higher standard deductions under the new law reduces the need for many people to itemize. The Joint Committee on Taxation estimates that 94 percent of households will claim the standard deduction in 2018. Here are the deductions that go away.
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Other miscellaneous deductions previously subject to the 2 percent AGI cap
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
- Long term capital gains rates are now:[iii]
| Long-Term Capital Gains Rate | Single Taxpayers | Married Filing Jointly | Head of Household | Married Filing Separately |
| 0% | Up to $38,600 | Up to $51,700 | Up to $38,600 | Up to $77,200 |
| 15% | $38,600-$425,800 | $77,200-$479,000 | $51,700-$452,400 | $38,600-$239,500 |
| 20% | Over $425,800 | Over $479,000 | Over $452,400 | Over $239,500 |
MAKE A PLAN, NOW!
Your action plan for this week is to sit down with your tax preparer as soon as possible to make sure that you have a plan making sure the new tax law is working for you in the best ways possible.
Here are more resources to read further on this topic.
https://www.fool.com/taxes/2018/01/18/your-complete-guide-to-the-2018-tax-changes.aspx
https://www.taxbuzz.com/blog/tax-reform-side-by-side-comparison-current-law-to-new-tax-law
[i] Joint Explanatory Statement of the Committee of Conference
[ii] Joint Explanatory Statement of the Committee of Conference
[iii] Tax Cuts and Jobs Act
