The new United States tax laws which could impact future bankruptcy filings was signed into law on January 3, 2018. The new law brings with it many changes that will affect consumers as well as businesses. In general, the biggest impact may prove to be on businesses, however there are some important changes that will impact the majority of American taxpayers and future bankruptcy filers.
Consumers who are contemplating filing bankruptcy under chapter 7 or chapter 13 bankruptcy may feel an impact if they are above median income earners who need to pass the means test to qualify for bankruptcy or who may seek lower plan payments in chapter 13 bankruptcy. This is because in general, for most higher earning Americans, they will likely receive a tax cut in the immediate future which will make available more disposable income in which to pay to creditors through a chapter 13 bankruptcy, or give less of a deduction on the bankruptcy means test.
How does the Means Test Work in Bankruptcy?
The means test determines how much disposable income a person has to pay their creditors. If this number is zero, then there is a good chance you could qualify for chapter 7 bankruptcy. If the number is higher, then you would likely to file chapter 13. In chapter 13 bankruptcy you would then seek to make your available disposable income lower by taking allowed deductions, similar to doing your taxes, on the means test. These deductions are often calculated from your paystubs and include things like your federal taxes, Medicare, social security etc. Therefore, if these amounts are less in the future, then you won’t get as much of a deduction on the means test.
The good news is that a consumer will have more disposable income in which to possibly avoid filing bankruptcy, although for most people, it probably will not make a significant difference. For lower income earners who are already below the median income, the impact from a bankruptcy standpoint will most likely be negligible.
So what are the 2018 Major Changes to the Tax Code Moving Forward?
1. Your income may put you in a different tax bracket
Tax brackets have changed under the new tax law. Taxpayers will want to look at the changes and what they mean for those filing single and those filing jointly. Take a look at all of the new tax brackets and tax percentages here.
2. A majority of American taxpayers will benefit from lower tax rates
For example, single taxpayers earning between $38,701 and $82,500 will reduce their tax liability from 25 percent to 22 percent. Additionally, those joint filers earning between $165,001 and $233,350 will get a reduction in tax liability from 28 percent down to 24 percent. For five additional tax brackets, there will be reductions of 3 percent or more. To illustrate the potential savings on higher earning households, consider that a family earning $233,350 would potentially reduce their tax liability by more than $9,000.
3. The standard deduction goes up and the personal exemption goes away.
The new tax plan increases the standard deduction from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples. The personal exemption has been eliminated. The net effect is a modest increase in the overall tax savings for those taxpayers who did not previously itemize deductions.
4. Tax preparation fees are no longer deductible
You can no longer write off your previous year’s tax preparation fee. Previously the fee you paid a professional to do your taxes was an eligible deduction.
5. You can no longer write off mileage if you are a W-2 employee
Previously, mileage had to exceed 2 percent of your adjusted gross income (AGI) in order to write it off, but now even if that 2 percent is met or exceeded it cannot be written off against income.
6. Taxes on business owners has changed
If you own a business, you will now have a flat tax of 21 percent, instead of the 35 percent tax rate that was previously in place. This results in a huge tax savings for business owners. The idea is that the savings will trickle down to employees of these companies but only time will tell if consumers will benefit or this tax break just makes companies richer.
7. The child tax credit will go up from $1,000 to $2,000
If you have a child living with you who was under the age of 17 at the end of the year you qualify for this deduction. This change also increases the income threshold at which the credit gets phased out to $400,000 for married taxpayers and $200,000 for others. This could mean significant savings for taxpayers with large families.
8. Medical and dental expense deductions have been expanded
While the percentage has gone up and down over the years, the most recent requirement was that your medical and dental expenses had to exceed 10 percent of your adjusted gross income (AGI) in order to write them off against your income. Now, they must only exceed 7.5 percent of your AGI for you to be able to deduct them.
9. Alimony is no longer deductible or taxable
Under the new tax law, alimony will no longer be deductible against income for the person paying it, nor will it count as taxable income for the person receiving it. This change is effective for divorce decrees signed after January 1, 2019.
10. Entertainment expenses can no longer be deducted, but meals can
The deduction for business-related entertainment has been repealed as part of the new tax plan. Businesses can still generally deduct 50 percent of the cost of qualified meals.
11. There are lower limits on mortgage interest deductions
Securing a good mortgage interest rate may matter more now than ever. This Is because home mortgage interest for debt incurred after December 15, 2017 to acquire or improve a home, is now limited to the interest on $750,000 worth of principal. This is a decrease from the prior $1,000,000 principal limitation and applies to both primary and secondary residences. Home loan debt acquired prior to December 15, 2017, is grandfathered and this change does not apply. This provision could affect Washington consumers more than in other states as the rise in property values continues and the median household value in Seattle is above $750,000.
12. There is a limit on interest deductions for home-equity lines of credit (HELOCs)
Like primary mortgage loan interest, the interest on HELOC loans has also been impacted by the new tax law. Interest on these loans will no longer be deductible, regardless of when the loan was acquired, unless the funds are used explicitly for home improvements or acquisitions.
13. There are now limitations on property, state and local tax deductions (“SALT”)
Taxpayers’ state and local tax deductions will now be capped at $10,000 under the new tax legislation. Meaning, if you itemize deductions on your taxes, you will be able to deduct your state individual income, sales and property taxes up to a limit of $10,000, but you’ll have to choose between property tax and income or sales tax. All three cannot exceed that $10,000 amount. This reduction will also impact Washington consumers negatively as the state and local taxes are rising sharply in 2018 to over 17% in some areas and the net result will be less of a deduction if taxes exceed $10,000.
14. The estate tax exemption is doubled
The new tax law doubles the estate tax exemption to $11.2 million for single filers and $22.4 million for joint filers. This change will only affect the roughly 1 percent of the American population that pays estate taxes.
15. The Obamacare medical tax is no more
The new tax legislation eliminates the individual health care mandate penalty tax that was imposed by the Affordable Care Act (aka, “Obamacare”) beginning in 2019. However, The penalty tax will remain in effect for the 2018 calendar year.
16. “Like-kind” exchanges are limited
Like Kind Exchanges under Section 1031 of the Internal Revenue Code are now limited to exchanges of real property. They no longer apply to any other property, including personal property associated with real property.
17. Education tax credits, student loan interest deductions remain
Many of the 44 million Americans with student loan debt feared that these changes could be devastating. However, the ability to deduct student loan interest will remain intact in the future.
18. The use of Section 529 accounts has been expanded
This may be one of the most significant impacts of the tax reform on education. Section 529 accounts, which are tax-advantaged savings and prepaid tuition plans designed to encourage people to save for future college costs, have been expanded. Starting in 2018, these accounts can be used for tuition at public, private or religious schools in addition to college tuition. Section 529 will be limited to $10,000 per student during any taxable year.
If you live in Washington State and are looking for assistance with figuring out your bankruptcy or debt settlement options, give Symmes Law Group a call at 206-682-7975 to speak to a debt relief attorney today.