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Other 2018 Tax Law Changes

The New 2018 tax brackets

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

DATA SOURCE: JOINT EXPLANATORY STATEMENT OF THE COMMITTEE OF CONFERENCE.

Standard deduction and personal exemption

While it’s being sold as a tax cut, the higher standard deduction really falls more under the category of a simplification.

Yes, the standard deduction has roughly doubled for all filers, but the valuable personal exemption has been eliminated. For example, a single filer would have been entitled to a $6,500 standard deduction and a $4,150 personal exemption in 2018, for a total of $10,650 in income exclusions. Under the new tax plan, they would just get a $12,000 standard deduction. Is it better? Yes. But it’s not really “doubled.”

Having said that, here’s a comparison between the standard deductions of the new and old tax laws.

Tax Filing Status Previous Standard Deduction (Set to take effect in 2018) New Standard Deduction
Single $6,500 $12,000
Married Filing Jointly $13,000 $24,000
Married Filing Separately $6,500 $12,000
Head of Household $9,350 $18,000

DATA SOURCE: IRS AND TAX CUTS AND JOBS ACT.

Capital gains taxes

The general structure of the capital gains tax system, which applies to things like stock sales and sales of other appreciated assets, isn’t changing.

Short-term capital gains are still taxed as ordinary income. Since the tax brackets applied to ordinary income have changed significantly, as you can see from the charts above, your short-term gains are likely taxed at a different rate than they formerly were.

Also, under the new tax law, the three capital gains income thresholds don’t match up perfectly with the tax brackets. Under previous tax law, a 0% long-term capital gains tax rate applied to individuals in the two lowest marginal tax brackets, a 15% rate applied to the next four, and a 20% capital gains tax rate applied to the top tax bracket.

Instead of this type of structure, the long-term capital gains tax rate income thresholds are similar to where they would have been under the old tax law. For 2018, they are applied to maximum taxable income levels as follows:

Long-Term Capital Gains Rate Single Taxpayers Married Filing Jointly Head of Household Married Filing Separately
0% Up to $38,600 Up to $77,200 Up to $51,700 Up to $38,600
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

DATA SOURCE: TAX CUTS AND JOBS ACT.

Finally, the 3.8% net investment income tax that applied to high earners remains the same and with the exact same income thresholds.

Tax breaks for parents

The Child Tax Credit, which is available for qualified children under age 17, doubles from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400.

In addition, the phaseout threshold for the credit is dramatically increasing.

Tax Filing Status Old Phaseout Threshold New Phaseout Threshold
Married Filing Jointly $110,000 $400,000
Individuals $75,000 $200,000

DATA SOURCE: TAX CUTS AND JOBS ACT.

If your children are 17 or older, or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.

Furthermore, the Child and Dependent Care Credit, which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable. You can’t use both of these breaks to cover the same child care costs, but with the annual cost of child care well over $20,000 per year for two children in many areas, it’s safe to say that many parents can take advantage of the FSA and credit, both of which remain in place.

Education tax breaks

The Lifetime Learning Credit and Student Loan Interest Deduction are still in place, and the exclusion for graduate school tuition waivers survives as well.

One significant change is that the bill expands the available use of funds saved in a 529 college savings plan to include levels of education other than college. In other words, if you have children in private school, or you pay for tutoring for your child in the K-12 grade levels, you can use the money in your account for these expenses.

Mortgage interest, charitable contributions, and medical expenses

These three deductions remain, but there have been slight tweaks made to each.

  • First, the mortgage interest deduction can only be taken on mortgage debt of up to $750,000, down from $1 million currently. This only applies to mortgages taken after Dec. 15, 2017, preexisting mortgages are grandfathered in. And the interest on home equity debt can no longer be deducted at all, whereas up to $100,000 in home equity debt could be considered.
  • Next, the charitable contribution deduction is almost the same, but with two notable changes. First, taxpayers can deduct donations of as much as 60% of their income, up from a 50% cap. And donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.
  • Finally, the threshold for the medical expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. In other words, if your adjusted gross income is $50,000, you can now deduct any unreimbursed medical expenses over $3,750, not $5,000 as set by prior tax law. Unlike most other provisions in the bill, this is retroactive to the 2017 tax year.

The State and Local Tax deduction

The new rule limits the total deductible amount to $10,000, including income, sales, and property taxes.

Deductions that are disappearing

While many deductions are remaining under the new tax law, there are several that didn’t survive, in addition to those already mentioned elsewhere in this guide. Gone for the 2018 tax year are the deductions for:

  • 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% AGI cap
  • Moving expenses
  • Employer-subsidized parking and transportation reimbursement

Obamacare penalties will be going away

The tax reform bill repeals the individual mandate, meaning that people who don’t buy health insurance will no longer have to pay a tax penalty.

This change doesn’t go into effect until 2019, so for 2018, the “Obamacare penalty” can still be assessed.

Alternative minimum tax, version 2.0

The tax reform bill permanently adjusts the AMT exemption amounts for inflation in order to address this problem, and makes them significantly higher initially in 2018. Here’s how the AMT exemptions are changing for 2018.

Tax Filing Status 2017 AMT Exemption Amount 2018 AMT Exemption Amount
Single or Head of Household $54,300 $70,300
Married Filing Jointly $84,500 $109,400
Married Filing Separately $42,250 $54,700

DATA SOURCE: TAX CUTS AND JOBS ACT.

In addition, the income thresholds at which the exemption amounts begin to phase out are dramatically increased. Currently, these are set at $160,900 for joint filers and $120,700 for individuals, but the new law raises these to $1 million and $500,000, respectively.

The estate tax exemption

The new tax law doubled the current exemption. Now, for 2018, individuals get a $11.2 million lifetime exemption and married couples get to exclude $22.4 million.

Most of the individual tax breaks are temporary

It’s also important to point out that most of the changes to individual taxes made by the bill are temporary — they’re set to expire after the 2025 tax year.

Corporate tax rates

The bill lowers the corporate tax rate to a flat 21% on all profits for C-corporations.

In addition to these changes, the corporate AMT of 20% has been repealed.

The New 20 Percent Deduction for Business Income


If you operate your business as a sole proprietorship, partnership, or S corporation, your 2018 income from these businesses might qualify for the new 20 percent deduction.

The new 20 percent 2018 tax deduction can also apply to income you receive from your real estate investments, publicly traded partnerships, real estate investment trusts (REITs), and qualified cooperatives.

IRC Section 199A Deduction Overview

To qualify for the new 20 percent deduction, with no exceptions, you need qualified business income from one of the sources above, and you need “Defined Taxable Income” of:

· $315,000 or less if married filing a joint return, or
· $157,500 or less if filing as a single taxpayer

“Defined Taxable Income” is taxable income, before considering any Section 199A deduction.

Example. You are single and operate your dental practice as a proprietorship. It produces $180,000 of qualified business income. With your other income and deductions, your defined taxable income is $150,000. You qualify for a deduction of $30,000 (the lesser of $150,000 or $180,000 x 20 percent).

If you operate your practice as a partnership or S corporation and you have the same qualified business income, and defined taxable income numbers above, you qualify for the same $30,000 deduction. The same is true if your income comes from a rental property, real estate investment trust, or limited partnership.

Some VERY unfriendly rules apply to what Section 199A calls a “specified service trade or business”, such as operating a dental practice or accounting firm, where defined taxable income is above the thresholds above, plus phaseouts ($50,000 single or $100,000 married). At those income levels, the Qualified Business Income drops to ZERO for income from those sources.

But, Qualified Business Income from other sources could still help you qualify for the deduction.

Qualified Business Income

The term “qualified business income” means the net of qualified items of income, gain, deduction, and loss with respect to any of your qualified trades or businesses, within the United States only.

If the qualified business income produces a loss, then the loss creates a zero benefit for the year, and that loss carries over to the next year to ensure that your loss of money is penalized.

You do not include in qualified business income:

· any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss;
· any dividend, income equivalent to a dividend, or payment in lieu of dividends;
· any interest income other than interest income that is properly allocable to a trade or business;
· reasonable compensation paid to you by any qualified trade or business of yours (such as an S corporation) for services rendered with respect to that trade or business; or
· any guaranteed payment described in IRC Section 707 paid to you as a partner for services rendered with respect to the trade or business.

Example. You own five rental properties, all of which produce defined taxable income, and they are your sole source of qualified business income. During 2018, the five properties produce $70,000 of income on your Schedule E. You also sold one property at a $50,000 long-term capital gain, which you properly reported on forms other than Schedule E. Because of your itemized deductions, your defined taxable income for the year is $105,000.

Your 20 percent deduction is $14,000 ($70,000 x 20 percent). You consider the operating income of the rentals, and you don’t include the capital gain as qualified business income.

Defined Taxable Income Limit

The two previous examples were simple because the defined taxable income was below the thresholds.

Once you hit the income limit, you can trigger complications to your deduction, depending on the type of business you operate and whether you have wages and/or depreciable property. Here is how the defined taxable income limit comes into play.

Example. You are the sole operator of a proprietorship that is not a service trade or business. It creates $400,000 of qualified business income. Because of other deductions, you and your spouse have $300,000 of defined taxable income. Your 20 percent tax deduction is $60,000 ($300,000 x 20 percent) because you must apply the 20 percent to the lesser of your defined taxable or qualified business income.

When Income Exceeds the Thresholds (plus phase in)

Once you exceed the income limits as a non-specified service trade or business (something other than a dental practice), you face a “lesser than” calculation, with two calculations. The first is that your deductible amount is the lesser of:

· 20 percent of your qualified business income, or
· 50 percent of the W-2 wages paid by that qualified business.

W-2 wages do not include any amount that was not properly included in a return filed with the Social Security Administration on or before the 60th day after the due date (including extensions) for such return.

Example. You and your spouse have $1.2 million of defined taxable income for the year. Of this, you have qualified business income of $600,000, and that business paid $140,000 of W2 wages. Your deductible amount is the lesser of

· $120,000 ($600,000 x 20 percent) or
· $70,000 ($140,000 x 50 percent).

Your 20 percent Section 199A qualified business income deduction is $70,000 (the lower amount).

Because you and your spouse were over the defined taxable income limit of $315,000 plus the $100,000 phaseout ($415,000), you needed the wages to qualify for the deduction. In this example, with no wages, your Section 199A deduction would have been zero.

In the example above, we used the 50 percent of wages only calculation, which is the one of two possible exceptions. The second exception uses both wages and/or property. Under this rule, your Section 199A deduction is the lesser of:

· 20 percent of defined taxable income,
· 20 percent of your qualified business income, or
· the sum of 25 percent of the W-2 wages paid by the qualified trade or business, plus 2.5 percent of the unadjusted basis, immediately after acquisition, of all qualified property.

The term “qualified property” means depreciable tangible property

· that is held by, and available for use in, the qualified trade or business at the close of the taxable year;
· that is used at any point during the taxable year in the production of qualified business income; and
· for which the depreciable period has not ended before the close of the taxable year.

For Section 199A, the term “depreciable period” means, with respect to qualified property of a taxpayer, the period beginning on the date the property was first placed in service by the taxpayer and ending on the later of:

· the date that is 10 years after such date, or
· the last day of the last full year in the applicable recovery period, ignoring any alternative depreciation system period under Section 168(g).

Example. You are single with defined taxable income of $500,000. You have qualified business income of $420,000. Your qualified business owns a building and machinery that qualify as qualified property and that have an original cost (no improvements) of $1.2 million. The business pays no wages. Most of the work is done by robots. Your Section 199A deduction is the lesser of

· $84,000 ($420,000 x 20 percent), or
· $30,000 ($1.2 million x 2.5 percent).

Top Ten Takeaways

1. Your deduction is not limited when your defined taxable income is less than $157,500 if you are single, or less than $315,000 if you file jointly with your spouse. Under those limits, even dental practice income qualifies for the full 20 percent of qualified business income.
2. Once you are above the income thresholds and phaseouts, you can qualify for the Section 199A deduction only when:
a. you are not in the out-of-favor group (accountant, dentist, lawyer, etc.), and
b. your qualified business pays W-2 wages and/or has depreciable property.
3. Since the taxable income from Dental Service Organizations (DSO’s) can likely qualify for the section 199A deduction, regardless of the income threshold, it will be more important than ever to consider separating the clinical functions of your practice, from the business/entrepreneurial functions, in order to take advantage of the new Section 199A deduction.
4. Many dentists will want to consider forming their own leasing company to make large equipment purchases in the future, as profits from leasing can be QBI. But the loss of section 179 depreciation, and possible state sales tax, can complicate the decision.
5. Since rental income can qualify as QBI, it is important to charge your tenants the maximum allowable rent under your lease agreements, and to be sure to have escalation clauses built in.
6. Anyone practicing as a C-corporation should definitely consider electing S-corp status if their income is below the threshold.
7. Associate dentists will want (more than ever) to set up their own S-corporations to contract with owner doctors to provide services, rather than being W2 employees.
8. Dentists who purchase existing practices are more likely now to want to be single member LLC’s, taxed as sole proprietors, rather than the S-corps traditionally selected prior to 2018.
9. Planning carefully regarding section 179 depreciation and bonus depreciation will be critical for dentists with income near the thresholds.
10. Married couples will now have to plan together, since the new thresholds are based on total family income.