This post was written to help navigate the 2018 tax changes, which is the largest tax legislation that has taken place since 1989 and will affect almost every tax payer. The author is Frank Marrocco of Frank D. Marrocco, CPA, celebrating 30 years in business. They provide an array of accounting services: individual, corporation, partnership, estate accounting for probate, fiduciary/trust work, occasional bookkeeping services.
HOW THE “TAX CUTS AND JOBS ACT” WILL IMPACT TAX RETURNS IN 2018
Virtually all taxpayers will be impacted by changes in last year’s tax reform legislation. Most of the tax changes took effect in 2018. The following paragraphs will highlight many of the changes that will most Form 1040 filers.
Tax brackets and tax rate changes
The new rate changes are slightly lower and the brackets are generally slightly broader.
Old rates were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
New rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%
For example, under the 2017 rates and brackets, a single taxpayer with $40,000 of taxable income would be in the 25% bracket and would have a liability of $5,739. In 2018, the same taxpayer would be ¡in the 22% tax bracket and would have a liability of $4,740.
While most taxpayers will pay less in taxes, some taxpayers will pay a slightly higher tax rate in 2018. This is most likely to Impact the upper-middle class individuals with a marginal rate of 35% up from 33%. Those individuals were previously in the upper part of the 33% bracket in 2017 and now are in the 35% in 2018.
Personal and dependent exemptions are eliminated
In 2017, taxpayers claimed a personal exemption for themselves, their spouse and each qualifying child or relative. Each exemption reduced taxable income by $4050. These exemptions and deductions are eliminated from 2018 through 2025. In 2026, taxpayers will again be able to claim personal and dependent exemptions again.
Child tax credit increased through 2025
The TCJA increases the maximum child tax credit from $1000 to $2000 per qualifying child under age 17. The refundable portion of the credit increases from $1000 to $1400. That means taxpayers who don’t owe tax can still claim a credit of up to $1400. In order to claim the credit, the taxpayer must have a Social Security Number (SSN) for each child by the due date of the return.
New credit for non-child dependents
There is a new $500 nonrefundable credit for dependents who do not qualify for the child tax credit. Taxpayers can now claim this credit for children who are too old for the child tax credit, as well as non-child dependents. There is no Social Security Number requirement to claim this credit. The credit can’t be claimed by taxpayers or their spouse.
Standard deduction Increased through 2025
The standard deduction will increase as follows:
$12,000 for Single filers (increased by $1600 if over age 65)
$18,000 for Head of Household filers (increased by $1600 if over age 65)
$24,000 for Married filing jointly filers (increased by $1300 each if over age 65)
Because of the Increase in the standard deductions, many taxpayers may not have to file Schedule A for Itemized Deductions. However, I suggest you may want to continue to track your expenses and make a comparison to choose the tax benefit with the larger value particularly single taxpayers.
Some Itemized deductions are either eliminated, limited or modified
Fully eliminated are:
- Miscellaneous itemized deductions subject to the 2% floor
- Employee business expenses
- Tax preparation fees
- Investment fees
- Personal casualty and theft losses with certain exceptions (previously deductible if over 10% of Adjusted Taxable Income
Limited deductions
- State and local income taxes plus real and personal property taxes may be deducted but are limited to a combined total of $10,000 ($5000 if MFS)
- Home mortgage interest
- Interest on a home equity loan is no longer deductible
- Interest on a new home mortgage is limited to interest paid on a maximum of $750,000 ($375,000 if MFS) for mortgages taken out after December 14, 2017
- Taxpayers with mortgages prior to December 15, 2017, they can continue to claim home mortgage interest on up to $1 million
Modified deductions
- Charitable contributions The limit on charitable cash contributions is increased from 50% of adjusted gross income to 60% of adjusted gross income.
- Gambling losses continue to be deductible to the extent of gambling winnings
- Medical expenses remain deductible f they exceed 7.5 % of adjusted gross income.
However, in 2019, the threshold will increase to 10% of adjusted gross income. The overall limit on itemized deductions based on adjusted gross income is eliminated.
Many of the “Above-the-line” deductions eliminated, limited or modified
Fully eliminated
- Alimony deduction for payments made under orders executed after December 31, 2018 are no longer deductible. Also alimony received is no longer taxable either. However, payments under existing orders are grandfathered and my continue to be deducted by the payer and must be reported as income by the recipient
- Tuition and fees deduction expired on December 31, 2017 and has not yet been renewed
Mostly eliminated
- Moving expenses are disallowed except for active members of the military who relocate pursuant to military orders
Deductions that remain the same
- Educator expense deduction may continue to deduct up to $250 per year for unreimbursed classroom supplies
- Student loan interest of up to $2500 paid on student loans
- Health savings account (HAS) deductions
- IRA deductions
- Deductions for self-employed taxpayers which include the SE tax, SE health insurance and SE qualified retirement contributions
Health care penalty eliminated
The penalty for failure to obtain health insurance coverage will be eliminated in 2019.
Self-employed taxpayers may claim a new deduction for qualified business income
There is a deduction for up to 20% of qualified business income from a sole proprietorship, partnership or S Corporation.