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What Employers Need to Know About 2018 Tax Changes

By David Lewis, Executive Vice President

 Now that the Tax Cuts and Jobs Act has become law and the IRS just released the new income-tax withholding tables for 2018, you may be scratching your head about what exactly this means and what it will affect.  The Act will have wide implications for millions of workers and employers, with changes to employee personal exemptions, income tax rates, corporate tax rates, fringe benefits, and the ACA.

Much of the Act has already gone into effect as of January 1, 2018 and the withholding tables need to be adopted no later than February 15, 2018 (as an aside for our clients: we are currently working towards this deadline and will let you know as soon as our software reflects these tables). These tables were designed to work with the current W-4s, so there is no need for employees to resubmit them (or for you to panic).

This blog outlines what’s in the law: what we currently know and where you can find more information. And don’t worry, we’ll keep it updated as the IRS releases guidance.

 

The Individual Mandate Penalty Will Go Away in 2019

What Changed: The Tax Cuts and Jobs Act eliminates the penalty for not having coverage under the Individual Mandate portion of the ACA Shared Responsibility provision. There’s a misconception that the ACA has been overturned or that the law has changed – it hasn’t. Only the penalty used to enforce the law with individuals has been removed.

What Hasn’t Changed: The Employer portion of 4980H Shared Responsibility has remained unchanged, meaning Applicable Large Employers (ALEs) are still required to offer plans with Minimum Essential Coverage with Minimum Value to eligible employees. Those who do not make compliant offers will be subject to IRS penalties.

Effective Date: January 1, 2019, meaning penalties and reporting for 2017 and 2018 will remain in effect for everyone, even individuals.

What You Should Do: You may see fewer employees enroll in 2019, but you should continue to offer compliant coverage, stay on top of your Forms 1095-C, and don’t stop your ACA tracking. Moreover, the IRS is expected to begin issuing prior year penalties in January 2018.

 Additional Reading from SHRM.

 
Income Tax Brackets Will Change

What Changed: Perhaps the most widely discussed aspect of the Tax Cuts and Jobs Act is the new tax rates. A summary of the new rates for individuals and married filing jointly can be found below. The full list of changes, including head of household rates, can be found in the Congressional Joint Explanatory Statement.

  • Individuals:
New Rate New Income Bracket Old Rate Old Income Bracket
10% Up to $9,525 10% Up to $9,525
12% $9,525-$38,700 15% $9,525-$38,700
22% $38,700-$82,500 25% $38,700-$93,700
24% $82,500-$157,500 28% $93,700-$195,450
32% $157,200-$200,000 33% $195,450-$424,950
35% $200,000-$500,000 35% $424,950-$426,700
37% $500,000+ 39.6% $426,700
  • Married Filing Jointly:
New Rate New Income Bracket Old Rate Old Income Bracket
10% Up to $19,050 10% Up to $19,050
12% $19,050-$77,400 15% $19,050-$77,400
22% $$77,400-$165,000 25% $77,400-$156,150
24% $82,500-$157,500 28% $93,700-$195,450
32% $157,200-$200,000 33% $195,450-$424,950
35% $200,000-$500,000 35% $424,950-$426,700
37% $500,000+ 39.6% $426,700

 

Effective Date: January 1, 2018.

What You Should Do: Start using the new tables no later than February 15, 2018. We are working to get the new tables into our software with this deadline in mind. Stay tuned!

 

Standard Deductions Will Double

What Changed: The law temporarily increases the basic standard deduction for individuals across all filing statuses. Under the provision, the amount of the standard deduction is temporarily increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals.

Effective Date: The provision is effective for taxable years beginning after December 31, 2017.

What You Should Do: The decision whether to itemize or take the standard deduction is up to individual employees at tax time.

 

W-4 Exemptions Will Go Away

What Changed: Tax payers will no longer be able to claim withholding allowances on their W-4s.

Effective Date: January 1, 2018.

What You Should Do: Nothing! The new tax withholding tables are designed to work with the current W-4s, so there is no need for employees to resubmit them.

What We Are Doing: We’re working hard to get the new tax withholding tables into our software right now and will be done before February 15, 2018 – the date the IRS has provided as the deadline to adopt the new withholding tables.

 

Benefits Changes

If You Offer Commuter Benefits: In 2018, employees can deduct (pre-tax) up to $260 per month for commuting costs ($20 for biking expenses). However, the bill eliminates the business deduction for qualified mass transit and parking benefits, except when necessary for safety of an employee. If you currently pay for commuter costs on behalf of your employees, make sure your company is no longer counting on the tax break. More from

Paid Leave Credit: According to the National Law Review, “New section 45S of the Internal Revenue Code provides a tax credit to employers that voluntarily offers up to twelve weeks of paid family and medical leave annually to qualifying employeespursuant to a written policy.  To enjoy the tax credit, the leave benefit amount need not be equal to the employee’s normal pay, but must be at least 50% of that amount. The amount of the tax credit is 12.5% if the leave benefit amount equals 50% of normal pay. The 12.5% credit increases incrementally (up to a maximum of 25%) to the extent the leave benefit exceeds 50% of normal pay.  A qualifying employee is one who has been employed by the employer for at least a year and who is paid no more than 60% of the “highly compensated employee” dollar amount on an annual basis (i.e., $72,000 for 2018).”

Retirement Plans: The law retains current 401(k) rules, but will repel the rule that allows recharacterization of ROTH IRA contributions as traditional IRA contributions to unwind a ROTH conversion. Rules for hardship distributions will be modified.

Vehicle Depreciation: The law raises the cap placed on depreciation write-offs of business-use vehicles. The new cap will be $10,000 for the first year a vehicle is in service, $16,000 for the second year, $ 9,600 for the third year, and $5,760 for each subsequent year until costs are fully recovered. This applies to vehicles placed in service after 12/31/2017.

 

Other Changes

State and Local Tax Deduction Caps (SALT): In 2018, the amount of State & Local Tax deductions and Real Estate taxes will be capped at $10,000 (combined).

Lowers Cap on Mortgage Interest Deduction: In 2018, mortgage interest deduction will only be allowed for debt up to $750,000 for all new mortgages. Homeowners who already have a mortgage will be unaffected by this change. Mortgage interest from home equity loans will no longer be allowed to be deducted.

Child Tax Credit Expanded: In 2018, the Child Tax Credit will double to $2,000 for children under the age of 17. The income threshold to be eligible for this credit will also be raised to $200,000 for individuals and $400,000 for married couples.  This credit may also be refundable up to $1,400 if a taxpayer’s federal income tax liability nets out to zero.

Alternative Minimum Tax (AMT): In 2018, Alternative Minimum Tax income exemptions levels will be raised to $70,300 for individuals and $109,400 for married couples.

Federal Estate Tax: In 2018, the amount of money exempt from estate tax has been doubled to $5.49 million for individuals and $10.98 million for married couples.

Non-Child Dependent Credit: In 2018, the Non-Child Dependent Credit will be $500 for each non-child dependent who is supported, ages 17 or older.

 

Businesses and Corporations

(effective for the 2018 tax year unless otherwise noted)

Lower Tax Burden on Pass-Through Businesses: S-Corps, LLCs, and Partnerships will receive a 20% deduction in pass-through income. This will apply to anyone in a service business unless their taxable income is $315,000 for a married couple or $157,500 for an individual.

Pass-Through Tax Break Rule: If the owner or partner also draws a salary from the business, that money would be subject to ordinary income tax rates. This law will place limits on how much income would qualify for the pass-through deduction.

Corporate Tax Rate: The corporate tax rate is cut from 35% to 21%. This law will also repeal the AMT on Corporations.