This act has been signed into law. There are good and bad changes but overall it should have good results for farmers. We’ve heard all kinds of rumors about the new tax law. I even heard that the new tax form would be the size of a post card. Not true! The truth is that while the new code may be simpler, it is still complex. The net result is that most, if not all, taxpayers will pay less taxes in 2018 than they did in 2017.
So, what are the major changes for individuals?
- The tax rates have been lowered except for the lowest bracket of 10%. There are still 7 tax brackets but the upper and lower limits have changed. People with the same income in 2018 as compared to 2017 may see themselves in a higher tax bracket.
- The standard deduction has nearly doubled.
- Maximum of $10,000 allowed as an itemized deduction for combined state income taxes, sales taxes, property taxes and excise taxes. If you live in an area with high property taxes on homes, this could affect you.
- New mortgage interest on primary and one second home is still deductible but the cap is set at $750,000 of debt. Existing mortgages will not be affected.
- Home equity debt is only deductible if the money was used to buy, build, or improve your home.
- There is a whole laundry list of exemptions that are not allowed. These include but are not limited to union dues, tax preparation fees, casualty and theft losses, and personal exemptions.
- There is good news for parents. The child tax credit is increased to $2,000 per child.
- Property taxes remain deductible but the cap is $10,000. This does not affect business property such as farm land.
- The estate tax has changed. The limit was raised to $11,180,000. If your net worth exceeds this, you may benefit from good estate planning.
This act also affects businesses.
- All C corporations, regardless of earnings, will pay 21%.
- No rate changes for LLCs, partnerships and S corporations.
- 100% depreciation will be available on new and used equipment.
- Section 179 depreciation limit is raised to $1,000,000.
- New farm machinery is now depreciated over 5 years rather than 7.
- Tax Free Exchanges or 1031s are still available for real estate transactions but not personal property. Personal property exchanges (trade-ins) will be treated as a sale of an asset and then the purchase of a new one.
- Qualified small businesses may be eligible for a 20% deduction against taxable income but there are earning and wage limitations. This is intended to level the playing field between small and large business.
- New net operating losses starting in 2018 can be carried forward indefinitely.
- Individual farm losses can only be carried back 2 years instead of 5 years.
- Several expense will be disallowed including, employer provided meals, entertainment expenses, and membership dues for clubs.
Disclaimer: This article is not intended to give specific tax or legal advice. It is only a brief overview of tax changes that are or may be taking place. It is not an in-depth study covering all new tax laws. It is not legal or tax advice that should be relied upon. Please review your situation with your trusted, qualified tax professional to learn how the new tax code affects you. By reading this disclaimer, you agree not to rely on this article for legal or tax advice and to hold the author harmless from any claim.