2018 Tax Change (TCJA) details

Details of Changes

The following updates to the system have been made to reflect tax law changes associated with the Tax Cuts and Jobs Act of 2017 (TCJA).  For more details behind what has and has not changed, we suggest this article by Michael Kitces ↗️.

New Tax Brackets

Tax Brackets have been updated to the new 10%, 12%, 22%, 24%, 32%, 35% brackets with associated income thresholds.

Standard deduction, Exemptions, Credits

The standard deduction has been updated to $12,200 for single and $24,400 for joint filing for 2019.  The previous values for 2018 were $12,000 and $24,000 respectively. This is reflected on line 8 of the projected 1040.  Personal exemptions, previously seen on line 42, have been eliminated.

The child tax credit has been increased to $2,000 per child, illustrated on line 12, and the associated income phaseout thresholds have been increased.

Qualified Business Income

The new deduction for qualified business income has been incorporated.  This provides a 20% deduction for business income from an LLC, partnership, or S corporation.

Deductions on any income indicated from a business type of LLC, partnership, or S Corp, as well as any 'Self-employment income' will automatically be included.  The deduction is 20% of business income, capped at 20% of taxable income (pre-deduction).

The deduction is phased out based on income limits for 'specified services businesses'.  By default we assume that any business is a 'specified services' business; modify this assumption by un-checking the 'Service business' box found on the business or self-employment income card.

For business income coming from a 'Service business', in 2019 the deduction phases out:

  • Filing Joint: phase out begins at $321,400 of taxable income (pre-deduction), and is fully phased out by $424,400 (2018 values: $315,000 - $415,000).
  • Filing Single: phase out begins at $160,725 and is fully phased out at $210,725 (2018 values: $157,500 - $207,500).
  • The phase out reduces the deduction by 1% of business income per $1,000 of taxable income for couples and 2% of business income per $1,000 of taxable income for single.

At this time we do not consider the limitation on deductions associated with the amount of wages paid to employees.

You can see the qualified business income deduction on line 9 of the 1040.

Itemized deductions

The $10,000 cap on state & local Income tax and property tax deductions has been included.

Any expense indicated as a miscellaneous itemized deduction will no longer be reflected as a deduction on Schedule A.

AMT exemption updated

The AMT exemption amount and phaseout has been updated.

Additional Impacts

When using the Distribution and Conversion tool on the Tax > Distribution screen, RightCapital will use the tax brackets associated with the tax law indicated for the client.

If the tax law is set to TCJA with the sunset provision, the current tax brackets will be utilized through 2025 and then revert to the 2017 tax brackets. This is referenced on the screen by listing the respective tax rates associated with the brackets; e.g. the '12%/15% tax bracket' illustrates the current 12% bracket through 2025 and then reverts to the prior 15% bracket.

When using Roth conversions to 'fill up' the tax bracket, the same approach will be used - the amount needed to fill the current 12% bracket through 2025 will be calculated and then the old 15% bracket thereafter.  For more details about the Distribution and Conversion tool, click here.