Must-know tax changes for 2018: Personal income taxes
There are several changes in personal income taxes this year that dentists need to be aware of. Here is the first of a two-part article outlining what to expect.
Andrew Tucker,JD, CFP, CPAJohn K. McGill, JD, MBA, CPA
It’s no secretthat the tax code has changed dramatically since the end of 2017; however, there still exists a lot of confusion on exactly what the changes will mean for most doctors. In this two-part installment, we will outline how the changes will affect certain areas of the tax code, starting with personal income taxes.
- The individual tax rates are reduced from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% in 2017 to 10%, 12%, 22%, 24%, 32%, 35%, and 37% beginning in 2018. Unfortunately, since the tax brackets (the amount of taxable income subject to each tax rate) have also been changed, the results are mixed. While married doctors at all income levels will receive tax cuts, single doctors with taxable incomes between $200,000 and $400,000 will see their tax savings decline and increase slightly.
- The standard deduction, which is taken by doctors who do not itemize their deductions, has been increased for single doctors from $6,350 in 2017 to $12,000, and from $12,700 in 2017 to $24,000 for married doctors beginning in 2018. However, personal exemptions of $4,050 for yourself, spouse, and each dependent (child) have been eliminated. Fortunately, most doctors will not notice a change here since these personal exemptions have been phased out for doctors whose adjusted gross income (AGI) exceeds $261,500 if single, and $313,800 if married. Along with the other changes, this will decrease the number of doctors who will itemize in 2018 and beyond.
- Beginning in 2018, no deduction is allowed for interest on home equity lines of credit. Furthermore, while interest on existing home mortgages of up to $1 million is grandfathered in and remains deductible, doctors can deduct home mortgage interest on no more than $750,000 of new mortgage debt incurred after December 15, 2017. Additionally, itemized deductions for state and local income, sales, and property taxes are capped at $10,000 beginning in 2018.
- While charitable contribution deductions will be allowed in an amount up to 60% of the doctor’s AGI, beginning in 2018 no charitable deduction will be allowed for payments made in exchange for college athletic event seating rights. In addition, all miscellaneous itemized deductions (tax return preparation fees, investment management fees paid personally, safety deposit box fees, unreimbursed employee business expenses, etc.) are eliminated beginning in 2018. Accordingly, when possible these should be paid through the practice for full deductibility.
- High-income doctors will enjoy further savings since the overall limit on itemized deductions is repealed. Currently, the total amount of the doctor’s itemized deductions is reduced by 3% of the amount by which the doctor’s AGI exceeds $261,500 for single doctors and $313,800 for married doctors.
- Alimony payments will not be deductible for any doctor entering into a divorce or separation agreement after December 31, 2018.
- The child tax credit is doubled to $2,000 for each child under the age of 17. More high-income doctors will be eligible to claim this credit since the income threshold is increased to $200,000 for single doctors and $400,000 for married doctors. The new law also allows doctors to claim a $500 credit for each nonchild dependent, such as a child age 17 or older.
- Section 529 distribution rules are relaxed to allow up to $10,000 of expenses per student for tuition at elementary or secondary schools, to be paid from the 529 plan each year without penalties.
- While the highly complex Alternative Minimum Tax (AMT) is retained, fewer doctors will be affected. That’s because some deductions that are added back in computing AMT have been eliminated (interest on home equity loans) or severely limited (deduction for state and local property, income, and sales taxes cut to no more than $10,000 annually). Moreover, the AMT income exemption has been increased to $70,300 for single doctors and $109,400 for married doctors, further limiting its impact.
Editor’s note: Part two of this column about tax changes will appear in the June 2018 issue of Dental Economics.
Andrew Tucker, JD, CFP, CPA,andJohn K. McGill, JD, MBA, CPA,provide tax and business planning for the dental profession and publish The McGill Advisory newsletter through John K. McGill & Company Inc., a member of the McGill & Hill Group LLC and your one-stop resource for tax and business planning, practice transitions, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com or call (877) 306-9780.