10 Changes in the New Tax Bill that Pharmacists Need to Know.
On December 22nd, President Trump signed the “Tax Cuts and Jobs Act” into law. And while both sides of the political aisle agree US tax laws should be simpler, the changes can feel like anything but. Here are 10 things you need to be aware of so you can have an educated discussion with your tax professional.
- Individual income tax brackets have been adjusted.
For some pharmacists, this could make quite a difference. Many of you will find yourself moving into lower tax brackets.
Credit: Bloomberg LP
- The standard deduction has been increased
The standard deduction has been roughly doubled to $12,000 for single filers and $24,000 for those who are married and file jointly. The hope is that more people will simply use the standard deduction. The Joint Committee on Taxation estimates that 94 percent of taxpayers will claim the standard deduction starting in 2018; about 70 percent claim the standard deduction under current law.
- Personal exemptions have been repealed
Personal exemptions for every taxpayer, spouse, and dependent have been eliminated entirely. Previously, exemptions of $4,050 per family member were provided. Effectively, this lowered your taxable income based on the number of people in your household. With this exemption removed your taxable income will appear higher. The concern here is for bigger families as the exemption’s elimination might actually offset the doubling of the standard deduction.
For Example: If you are married, filing jointly, and have 3 children.
Standard deduction increases from $12,700 to $24,000 (yay!)
Personal Exemptions decrease from $20,250 to $0 (ouch…)
Luckily if your dependents are under the age of 17, the child tax credit increase (point 5) should help to make up that difference.
- Business income has changed significantly.
All forms of doing business (aka business entities) EXCEPT C-corporations and trusts will be treated as pass-through entities. All of them are eligible for a 20% deduction from their net profit – i.e. after all deductions.
For Example: Jeff the apartment guy collects $300k rent from his property. He deducts $150k for property taxes, mortgage interest and insurance (they are not limited in the reform!) He deducts another $50k for maintenance, repairs and depreciation. Brad is left with $100k net rental income. He gets a 20% freebie deduction equal to $20,000.
Note: if your business or rental properties shows a net loss – there is no 20% deduction. 20% of zero is zero, sorry. Also This deduction is per business. If you have multiple businesses – each one calculates its own deduction. They will eventually add up on your tax return.
This deduction is not limited as long as your total taxable income (including W2s and everything else) is under the threshold of $315,000 for a jointly filing couple and $157,500 for single filers.
- The Child Tax Credit has been increased.
The Child Tax Credit will increase from $1,000 to $2,000 per qualifying child. The refundable credit amount will be limited to $1,400. For each dependent who is not a qualifying child, a $500 credit applies. Perhaps most important to pharmacists is that the income limit has increased. Previously the credit started phasing out for couple who made more than $110,000 per year. Now that credit phases out at $200,000 for single filers and $400,000 for filers who are married filing jointly.
Unlike a simple deduction, which lowers your taxable income, a credit actually lowers the end amount you owe dollar-for-dollar. So a family with two children that qualifies for the full credit would now take $4,000 off the total amount they owe after other calculations have been completed.
- Changes to 529 plans
Up to $10,000 per year can be used from 529 plans to pay for:
- Public, private, and religious elementary and secondary schools.
- Home school students.
- New imposed limits to itemized deductions.
- The aggregate amount of state and local income, sales, and property tax is capped at $10,000 per year. This will most likely effect those in high tax and high income areas such as California, New York and Hawaii.
- Deductible mortgage interest was previously capped at loans of $1 million. This is now reduced to $750,000 and applies to newly purchased first and second homes only. Rental properties continue to be excluded from this limit.
- Deduction for moving expenses are eliminated. There remains an exception for armed forces.
- Medical expense deduction thresholds have been reduced from 10% of the taxpayers adjusted gross income (AGI) to 7.5%
- Deduction for alimony payments eliminated and alimony received will no longer be included in income starting in 2019
- Tax preparation fees are no longer deductible in 2018 as an itemized deduction. However, the fees are still deductible against rental income so make sure to allocate a reasonable percentage of your tax preparation fees to Schedule E to lock in that tax benefit.
- Home equity line of credits (HELOC) for primary homes are no longer tax deductible starting in 2018. However, if the HELOC proceeds are used to acquire or improve an investment property, the related HELOC interest remains tax deductible, so make sure that you are tracking your interest expenses accurately. HELOC proceeds taken out on investment properties continue to be tax deductible provided proceeds are used for investment properties and not personal expenses.
- “Obamacare” individual mandate for health insurance has been eliminated.
This eliminates the penalty associated with not having healthcare. Remember, this could matter to both you and your patients!
- 1031 Exchanges have been clarified.
1031 exchanges have been used for years to limit taxes on capital gains. The basic idea is to sell a piece of real property and use the gains from that sale to buy a different property – totally tax free. Luckily, this maneuver has been preserved in the new tax code but has been clarified to only include real estate transactions.
- The Rehabilitation Tax Credit has been modified.
For those of you with older or even historic homes, the 10% tax credit provided for pre-1936 buildings has been repealed. Certified Historic structures will retain their 20% credit however.
As always, please consult with a tax professional about your options and what may be best for you and your situation. This is not a complete list of all changes from the recent Tax Cuts and Jobs Act. (That can be found here) This document and all text contained herein is not meant to render tax advice nor create a client relationship with you, the reader. This document is for informational purposes only and should not be used to render advice or to substantiate tax positions. Further, this document is not a complete analysis of the House or Senate bills and should not be construed as such.
[EDIT]: Point 3 incorrectly included the child tax credit in the deduction calculations. This has been removed for clarity. Further information has been added to point 5 about the difference between a credit and a deduction.