What to Expect as the Biggest Tax Law Change in over 30 Years Takes Effect
The Tax Cuts and Jobs Act (“TCJA”) was signed into law on December 22, 2017. This legislation introduces significant changes to taxation of your 2018 income, and is the biggest change in over 30 years. The TCJA redefines self-employment income, using a new concept called Qualified Business Income (“QBI”). Personal exemptions have been eliminated, tax brackets have changed, tax rates are lower throughout the new brackets, child credits have been enhanced, and itemized deductions were thoroughly overhauled. Other changes are included as well.
The State of Minnesota has not enacted a conformity bill with the TCJA. The calculation of taxable income in Minnesota for 2018 will rely on the rules in place for the 2016 tax year.
Due to the numerous changes in place for 2018, our fees for preparing your returns will increase. We will confirm your 2018 tax preparation fee when we receive your file.
Thank you for your business and we look forward to working with you once again.
Federal vs. State differences
Minnesota taxpayers will file a tax return with several major differences when compared to the 2018 Federal return, including the differences in itemized deduction rules. The Qualified Business Income deduction is completely excluded from tax year 2018 Minnesota returns. Personal exemptions will be calculated using the rules in place for 2016 returns. A total of 38 Federal-to-Minnesota differences are in play for 2018.
Other states have different level of compliance with, and differences from, the changes in the TCJA.
To properly manage the differences in the State and Federal returns for 2018, we’ll likely need additional information from you.
How will the changes to Itemized Deductions affect you?
Itemized deductions are expenses and expenditures, commonly called “write-offs”, that are subtracted from Adjusted Gross Income and which lower your taxable income. In prior years, we would gather information about your qualifying expenses – for medical expenses, mortgage interest, income and property taxes paid, charitable donations, brokerage fees paid, unreimbursed work expenses and a host of others – and summarize them on Schedule A. In choosing either itemized deductions, or the standard deduction, we would prepare the returns as if all clients would itemize, and then select the larger of the itemized or the standard deduction. In this way the maximum benefit for each client, based on the details of their situation, ensures that the lowest allowable taxable income – and tax – is calculated.
The TCJA markedly increases the standard deduction, while limiting many traditionally deductible expenses. Minnesota will continue to use the more generous itemized deduction rules from 2016. As such you may take the standard deduction on Form 1040, and take itemized deductions on the Minnesota return.
To allow for the most beneficial calculation of itemized deductions in your 2018 returns, please bring us all of the items that have traditionally gone into itemized deductions in the past. We’ll again calculate the lowest income and tax under these new rules.
New Mortgage Interest rules
Itemized deductions for mortgage interest paid are more restricted under the TCJA, and interest paid on home equity loans may no longer be deductible at all. We may request additional information from you to properly calculate this heavily revised deduction.
What is Qualified Business Income?
Qualified Business Income is income reported to a business owner or investor via a Schedule K1 (from your S-Corporation or Partnership), Schedule C, or Schedule E. For married taxpayers filing jointly with income of $315,000 or less, or others with income of $157,500 or less, you are eligible to exclude 20% of QBI from taxation on your Federal tax return. There is an alternate calculation based on wages paid in the business, and the fraction of wages attributable to each owner. The Qualified Business Income deduction is phased out for married taxpayers with income over $415,000 and other taxpayers with income over $207,500.
Wages paid from an S-Corporation to the owner do not qualify for treatment as QBI. Guaranteed payments to a partner also do not meet the QBI definition and also do not receive the QBI benefits.
We included a summarized checklist in your client letter. If you did not receive a client letter or if you would like the more detailed organizer sent to you, please let us know. We would be happy to provide either to you by e-mail or regular mail. Our main office number is (952) 934-8405.