The Tax Reform and how it affects your 2018 Tax Return!
The Tax Cuts and Jobs Act [TCJA], also known as The Tax Reform, contains several significant changes for the upcoming tax season. These changes include a reduction in the tax rates, increases in the standard deduction, new limitations to itemized deductions, suspension of personal exemptions, and reforms to a host of other tax provisions. This article will cover some of the changes, with hopes of providing clarity for what to expect this tax season.
Changes to the tax rates:
For the 2018 tax season, most people will pay less tax since the tax rates have been reduced.
2018 Tax Rates: 10%; 12%; 22%; 24%; 32%; 35%; 37%
2017 Tax Rates: 10%; 15%; 25%; 28%; 33%; 35%; 39.6%
Changes to the standard deduction:
The reform almost doubled the standard deduction. This deduction is used to reduce your adjusted gross income [AGI] and varies according to your filing status. Typically, the taxpayer would choose between the higher of the standard deduction or their itemized deductions. However, you cannot take both.
The standard deduction for each filing status is:
Single………………………………………………..........................$12,000 (up from $6,350 in 2017)
Married filing jointly/Qualifying widow(er)…….....$24,000 (up from $12,700 in 2017)
Married filing separately…………………………..............$12,000 (up from $6,350 in 2017)
Head of Household………………………………...................$18,000 (up from $9,350 in 2017)
The amounts are higher if the taxpayer is blind and/or over the age of 65.
Changes to Itemized deductions:
These deductions can only be taken by taxpayers who elect to itemize [ i.e. if the total of all your itemized deductions exceed your standard deduction amount, then these deductions may apply to your tax situation]
Deduction for qualified medical & dental expenses – you can now deduct your eligible un-reimbursed medical & dental expenses that is more than 7.5% of your adjusted gross income. Prior to the change, your expenses had to exceed 10% of your AGI.
Deduction for state & local, sales & property taxes – This deduction is now limited to a combined amount of $10,000 [$5,000 if Married filing separately]. Any taxes paid above this amount, cannot be deducted. However, for business owners, property taxes associated with conducting your trade or business are fully deductible.
Deduction for home mortgage interest & home equity loan interest – the home mortgage interest deduction is now limited to the interest you paid on a loan, secured by your main home or second home that you used to buy, build or substantially improve either property. Interest on home equity loans is only deductible if the loan proceeds were used to buy, build or improve your main or second home.
Charitable Contributions – The limitation on charitable cash contributions has increased from 50% to 60% of your AGI.
Miscellaneous itemized deductions – The deduction for job related expenses and other miscellaneous deductions that exceeded 2% of your AGI have been suspended. These job related expenses include, uniforms, union dues, tax preparation fees, un-reimbursed employee travel expenses, such as meals, lodging and business miles are now no longer deductible.
Deductions for casualty & theft losses – Casualty & theft losses are deductible only if they were caused by a federally declared natural disaster. Claims must include the FEMA code assigned to the disaster.
Limit on overall itemized deductions suspended – for high-income taxpayers, your itemized deductions are no longer limited if your adjusted gross income is over a certain dollar limit.
Changes to dependent benefits:
Personal exemptions – You can no longer claim a personal exemption for yourself, your spouse, or your dependents.
Child tax credit & additional child tax credit – The non-refundable child tax credit has increased to $2,000 per qualifying child. In addition, the income threshold in which the credit begins to phase out has been increased to $400,000 if married filing jointly [$200,000 if single]. This child tax credit has a refundable portion, known as the additional child tax credit, and it can go up to as much as $1,400 per qualifying child. Children with an individual taxpayer identification number [ITIN] can’t be claimed for either credit.
Credit for other dependents – There is a new non-refundable credit of $500 for each qualifying dependent and/or child who can’t be claimed for the child tax credit, such as a child over the age of 17, other older relatives in your household and children with ITINs. This credit is calculated with the child tax credit, and both are subject to a single phaseout when the taxpayer’s AGI exceeds $400,000 if married filing jointly [$200,000 if single]
Changes to ‘above the line’ deductions:
Moving expenses - The deduction for moving expenses have been suspended. This suspension does not apply to U.S. military active duty members. Employers will now include moving expense reimbursements in employee’s wages as taxable income.
Alimony payments – Alimony and separate maintenance payments are no longer deductible. In addition, these payments received can no longer be included as taxable income for the recipient.
Student loans discharges – Student loans discharged due to death or disability are not included in income. This applies to discharges after December 31st, 2017 and before January 1st, 2026.
Changes to alternative minimum tax [AMT]:
The income level at which the alternative minimum tax begins to phase out has been increased to $500,000 [$1,000,000 if married filing jointly]. The exemption amount also increased to $70,300 [$109,400 if married filing jointly/qualifying widow(er) or $54,700 if married filing separately].