As the calendar turns to November, it’s important to take a look at what you’re winning and losing with the 2018 tax law changes. You may want to know what your situation will look like compared to 2017 using the 2018 tax changes. Some business owners feel like they are losing a lot, because that’s what they hear— from the news, media, their friends, and maybe even their family. However, they may not lose at all. In fact, by losing deductions, business owners may win.
Let’s look at a comparison. Our comparison is designed to determine what’s lost with the new tax law changes, using the same financial information for each year.
The facts:
- Names: Billy Hoyle and Gloria Clemente
- Status: Married, filed as Married Filing Jointly (MFJ)
- Children: One (Sidney Deane)
- Occupations: Billy is a small business owner, and Gloria spends her time making sure Sidney is staying in line.
- Income: Billy nets $200,000 a year after expenses. Gloria has no additional income.
- House: Homeowners in Austin, TX
- Property taxes: $18,000
- Sales Tax deduction: $1,282
- Mortgage interest: $14,000
|
Tax year |
2017 |
2018 |
|
Taxpayer information |
MFJ, 3 Exemptions |
MFJ, 3 Exemptions |
|
Wages |
0 |
0 |
|
Schedule C income |
0 |
0 |
|
Pass-through income |
200,000 |
200,000 |
|
Total income |
200,000 |
200,000 |
|
Adjustments to income |
(10,565) |
(10,658) |
|
Adjusted Gross Income |
189,435 |
189,342 |
|
Itemized deductions |
(33,282) |
|
|
Standard deduction |
0 |
(24,000) |
|
Exemptions |
(12,150) |
Not Available |
|
Qualified Business Income deduction |
Not Available |
(33,068) |
|
Taxable income |
144,003 |
132,274 |
|
Regular tax |
27,478 |
20,979 |
|
Nonrefundable credits |
Phased out |
(2,000) |
|
Self-employment tax |
21,129 |
21,315 |
|
Total tax liability |
48,607 |
40,294 |
|
Withholding/ES payments |
0 |
0 |
|
Total tax due |
48,607 |
40,294 |
|
Tax savings |
8,313 |
What was lost in 2018?
- The ability to itemize deductions. The Standard Deduction was increased to $24,000 for MFJ taxpayers.
- Exemptions. In 2018, the deduction for exemptions was eliminated in favor of increasing the standard deduction.
What was won in 2018?
- Qualified Business Income Deduction (QBID). This 20% deduction was added to the tax code in 2018 as a result of the new tax law.
- Refundable Child Credit expanded. Billy and Gloria are now able to take advantage of the child tax credit because the phase-out was raised from $110,000 to $400,000.
This is just one example that before you succumb to the doom and gloom that you hear, you should take a moment to check your situation with your trusted advisor. Run the numbers to see where you compare to last year, and see if there’s anything that you can still change before the end of the year. Even though Billy and Gloria lost the ability to itemize deductions and the exemption deduction, they gained the QBID and the Refundable Child Credit. Had their 2017 income been used to calculate their 2018 income tax, these taxpayers would have seen an overall tax reduction of $8,313. Had this couple made estimated tax payments based on 2017, which many people have done, they would have lost the ability to use that money or, stated another way, they would have given the government an interest-free loan.
