New Tax Laws in 2018
Under the new tax laws, most of the changes will affect your 2018 tax return (taxes you will file in 2019). Many of the changes affect the standard and itemized deductions, including the nearly doubling of the standard deduction and removal or reduction of many of the deductions itemized. The article How Will the New Tax Reform Law Affect Your 2017 Taxes? reviews how the changes affected the taxes you filed in 2018 for tax year 2017. The IRS expects the new tax reform to simplify taxes for millions. However, the net tax difference will be minimal for most taxpayers filing individual returns. The changes will adversely affect higher income earners, who are not self-employed, especially filers who will continue to itemize deductions and people living in states with high property taxes.
Tax Planning for 2018: It's Never Too Early to Start!
If you haven't begun thinking about your 2018 income taxes yet, you're not alone! But doing some planning now could make a difference for your 2019 refund. Here we review some of the bigger changes affecting:
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If you have questions about any of these issues, we're here to help.
2018 Child Tax Credit
The child tax credit, currently limited to $1,000 for each qualifying child, has been increased to $2,000 for each qualifying child beginning in 2018 (for taxes filed in 2019). The new tax law did not affect how the child tax credit is calculated for 2017.
This increased credit for 2018 will help offset the elimination of the personal exemption for families with children. For example, in 2017, a married couple with two children would receive a total standard deduction and personal exemption of $28,900 ($12,700 standard deduction + $16,200 ($4,050 for each person) personal exemption). However, for 2018, with the elimination of the personal exemption — and even with the standard deduction almost doubling for married filing jointly filers — the same couple would only receive a deduction of $24,000. That's $4,900 less ($28,900 - $24,000) than in 2017. But, the new tax law increases the amount of income people can earn and still qualify for the credit. Starting in 2018, the credit starts phasing out for single filers at $200,000 (up from $75,000) and $400,000 for married filing jointly filers (up from $110,000). This means that many more families will qualify for the credit — and, for many, this results in a net tax benefit.
2018 Obamacare Penalty
For 2018, the Obamacare penalty remains effective if you went without health insurance coverage for more than three months and do not qualify for an exemption. Several exemptions are available for people who qualify. Affordability is one of the main exemptions applied when people do not carry coverage for the entire year due to the cost through the marketplace.
The IRS is no longer processing refunds for taxpayers who do not completely answer the questions regarding the Affordable Care Act. Instead, they are following up with taxpayers for the additional information needed, included Form 8962, if applicable, which can further delay refunds being processed by another 6 – 8 weeks. If you received form 1095-A, 1095-B, or 1095-C in the mail, make sure to file them with your tax documents in case you need a copy later.
Beginning in 2019 (for taxes you will file in 2020), however, if the law remains unchanged, the individual health care mandate will be repealed. This means that, in 2019, if you do not have health insurance for the entire year, you will no longer have to qualify for an exemption to avoid paying the penalty. For 2018, the standard penalty is an annual maximum of the national average price of a Bronze plan sold through the Marketplace. For low income earners, the annual maximum is $695 per adult and $347.50 per child, with a family maximum (if the children are claimed as dependents) of $2,085 or 2.5% of household income, less the taxpayer's filing threshold amount. The penalty is applied for each month the taxpayer does not carry coverage.
New Tax Deduction for Pass-Through Business Income
Starting in 2018, owners of pass-through businesses — such as sole proprietorships, rental property reported on Schedule E, partnerships, S-corps, and LLCs — will be able to deduct up to 20% of their business income, subject to limitations.
For example, if a small business owner makes $100,000 in profit in 2018, they will be able to deduct 20% or $20,000 before the tax rate is applied. There are additional limits that apply to professional service business owners, for example, attorneys, doctors, accountants, and consultants. For these professionals, the phaseout limit starts at $157,000 for single filers and $315,000 for married filing jointly filers.
See our full article on the new business income deduction for details!
Alternative Minimum Tax (AMT)
The Alternative Minimum Tax applies to high income earners. It was designed to limit the deductions higher income earners can claim. However, it has never been adjusted for the cost of inflation. Over the years, it started affecting more and more middle-class wage earners, which it was never intended to do. For taxpayers impacted by AMT, they basically must complete their taxes twice: once under the regular tax system and again under the AMT system. If the alternative minimum tax is higher than the regular income tax, then the taxpayer must pay the higher tax.
The new tax reform increases the income threshold for the alternative minimum tax significantly to $70,300 for single filers (up from $54,300) and $109,400 for married filing jointly filers (up from $84,500). In addition to the increase, it adjusts the AMT limits for the cost of inflation permanently and increases the phaseout amounts from $120,700 to $500,000 for single filers and from $160,900 to $1,000,000 for married filing jointly filers.
Standard Deduction and Elimination of the Personal Exemption in 2018
This is what everyone is talking about: the almost doubling of the standard deduction in 2018. With the standard deduction increase, the IRS expects millions more Americans to stop itemizing deductions and take the standard deduction.
Most taxpayers who do not itemize qualify for the standard deduction. The main exceptions are nonresident aliens or spouses who are filing separate returns. The standard deduction for tax year 2017 is $12,700 for married filing jointly / qualifying widow(er), $9,350 for heads of household, and $6,350 for single / married filing separately.
Beginning in tax year 2018 (taxes you will file in 2019), the new tax reform almost doubled the standard deduction. The standard deduction increases to $24,000 for married filing jointly / qualifying widow(er), $18,000 for heads of household, and $12,000 for single / married filing separately. For many, this simplifies the filing process as they will no longer need to keep receipts stuffed in shoeboxes or envelopes and add everything up at the end of the year.
The personal exemption is an additional deduction that taxpayers qualify to take for themselves and most of their dependents. For tax year 2017, the personal exemption was $4,050 per person. A married couple with two children therefore would qualify for a personal exemption of $16,200 ($4,050 x each dependent). Starting in 2018, the new tax law eliminates the personal exemption. As discussed above, however, the child tax credit for families that qualify has been doubled to $2,000 (from $1,000) to help offset the personal exemption elimination.
For most taxpayers, the elimination of the personal exemption in 2018 will likely lessen the net tax benefit of the new laws, offsetting the larger standard deduction. So it may be best to think of the new laws increasing the standard deduction and eliminating the personal exemption as simplifying the way you will complete your taxes, rather than creating bigger refunds. Although the net tax benefit will be negligible for most, the IRS expects it will allow millions more of Americans to take the larger standard deduction rather than continuing to itemize.
Itemized Deductions in 2018
One of the areas the new tax reform affects the most is itemized deductions. Not only is the standard deduction nearly doubling, but many itemized deductions are eliminated or reduced except for the deductions for medical and dental expenses and charitable donations. Most of the changes affecting itemized deductions will not be effective until tax year 2018. An exception is the change to the threshold for deductible medical and dental expenses: the former requirement that deductible expenses must exceed 10% of your adjusted gross income had been dropped down to 7.5%.
How will the changes affect you? Will you be one of the millions who will be able to ditch the complicated itemized deductions and take the standard deduction beginning in 2018? Will it no longer be worth your time to add up all your receipts and keep track of every mile you drive for work?
Continue reading to determine if itemizing deductions will change for you in 2018. If you will not be able to deduct more than $12,000 (single), $24,000 (married filing jointly), or $18,000 (head of household) in 2018, keep the receipts — but realize you probably will not need to open the box come tax time.
Deduction for Charitable Donations
You must itemize your deductions to deduct donations of cash or goods to your favorite charities. Donations are deductible if they are given to churches or religious organizations; 501(3)(c) nonprofit organizations; or federal, state, or local governments, if they are used for a public purpose. However, taxpayers must deduct from their donations any benefit they received from the donations. For example, if you donate $100 to PBS (public television) but receive a Masterpiece Theatre mug worth $20 in return, then $80 ($100 donation - $20 value of mug) would be deductible. Gifts given to individuals or political campaigns or candidates are not deductible. For donated goods, typically, you can deduct the fair market value (FMV) or the price they would get if you sold the property. Finally, if you donate cash or goods worth $250 or more, you must obtain a statement from the charity. Although the statement does not need to be submitted with the return, taxpayers should keep it with a copy of their return in the event of an audit.
The new tax laws increase the deductible allowance for charitable donations to 60% of your Adjusted Gross Income (AGI) from 50% of AGI. For most, this won't have a substantial direct effect on charitable giving. However, the indirect effect may test Americans' altruism. Millions more taxpayers will qualify for the standard deduction in 2018 (taxes filed in 2019), meaning millions more will obtain no tax benefit from donating to their favorite charities. The Council on Foundations released a statement on the new tax reform estimating that, as a result, there will be an annual decrease in charitable giving of $16 - $24 billion. If this proves anywhere close to being accurate, it will be devastating for the nonprofits that already struggle to meet the needs of the communities they serve. The new tax law thus may push us to truly give from our hearts and not just our wallets.
State and Local Income Taxes (SALT) / Property Tax Deductions
Currently for 2017, if you itemize deductions, you can deduct property taxes and the higher of either sales or local income taxes (SALT). Most taxpayers chose the income tax deduction because, typically, it is the largest. For 2017, as in the past, this deduction is not limited. The Tax Foundation estimates “more than 88 percent of the benefit flowing [from the state and local income tax deduction] to those with incomes in excess of $100,000.”
Beginning in 2018, taxpayers will be able to deduct the higher of either sales or state income taxes and property taxes, as in previous years; however, the deduction will be subject to a $10,000 cap. This cap will mainly affect high income earners and people who live in states with high property taxes, like California and New York. With the standard deduction nearly doubling in 2018 and the $10,000 cap placed on the deduction for state sales, individual income, and property taxes, many more taxpayers will claim the standard deduction rather than itemizing. For example, if a married couple filing jointly max out this $10,000 deduction, they would still need more than $14,000 in other deductions — such as charitable donations, mortgage interest, etc. — before itemizing their deductions even started to become beneficial.
Deductions for Mortgage and Home Equity Interest
Currently, taxpayers can deduct mortgage interest on loans up to $1,000,000 and home equity interest on loans up to $100,000.
Starting in 2018 (for taxes filed in 2019), the mortgage interest deduction is capped on loans up to $750,000 and the home equity interest deduction is eliminated. Although the elimination of the home equity interest deduction is permanent, the cap on mortgage interest reverts to loans up to $1,000,000 in 2026.
Additional Itemized Deductions Eliminated in 2018
Although they did not change for 2017, several itemized deductions are eliminated for 2018 (taxes filed in 2019). Under the new tax reform, the deductions are eliminated for unreimbursed employee expenses (including unreimbursed mileage, where employees use their own vehicle for work), casualty and theft losses (except those resulting from a federally declared disaster), moving expenses, and tax preparation expenses.
Should You Itemize in 2018?
Still not sure if you should itemize for 2018? Review your 2017 tax return (the return you filed in 2018). Did you itemize or take the standard deduction? If you are taking the standard deduction and do not expect any major changes in 2018, with the standard deduction nearly doubling in 2018 it probably will be best to take the standard deduction in 2018. If you itemized in 2017, did your itemized deduction total more than $12,000 if filing single, $24,000 if married filing jointly, or $18,000 if filing as head of household? If not, it probably will be best to take the standard deduction. If your itemized deduction was more, consider whether the reductions and eliminations will reduce your total itemized deduction amount for 2018.
Will you owe more taxes in 2018? Get a bigger refund? Should you itemize or take the standard deduction?
Every person’s tax situation is different. Schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group. Our professionals ensure you receive the best deductions for your individual tax situation and will help prepare you for the new tax reform changes that affect your 2018 taxes.
