The Tax Cuts and Jobs Act is the most significant tax law change since the 1986. These changes are dramatic not only to your tax return calculation, but also in appearance to your 2018 tax return that is due April 15, 2019. The government shutdown hasn't changed anything with the filing of your return or its due date.
This article goes over just the individual federal tax law changes. There will be other posts for changes to Partnerships, S Corporations, C Corporations, International taxes, and PA taxes. So stay tuned.
Tax Brackets
The top rate for 2017 was 39.5%. For this year, it was changed to 37%. Great news. The Marginal Tax Rates have also been lowered and the bracket of income taxed at each rate has been widened.
Standard Deductions
The standard deductions have almost been doubled from 2017. See table below of old and new rates:
Filing Status 2017 2018
Single/MFS 6,350 12,000
Married Filing Jointly 12,700 24,000
Head of Household 9,350 18,000
Given these increases in standard deductions along with other changes to itemized deduction rules, it will be more difficult to be able to itemize this year.
Itemized Deductions
State and Local Taxes - In 2017, you were allowed to deduct the total amount of state and local taxes paid during the year. This included income and property taxes.
For 2018, you are limited to $10,000.
Mortgage Interest - In 2017, you were allowed to deduct the mortgage interest on your home up to the total of $1.1 Million which includes $100,000 home equity.
For 2018, you are limited to a total of $750,00 for new debt incurred after December 31, 2017 in home mortgage indebtedness. There is no deduction for home equity loans either existing or new. No change for homeowners who mortgage was signed before December 31, 2017.
Medical - In 2017, taxpayers who itemized were allowed to deduct medical expenses that were over 7.5% of their AGI (Adjusted Gross Income).
In 2018, taxpayers who itemize are allowed to deduct medical expenses that are over 7.5% of their AGI.
After 2018 no deduction will be allowed.
Miscellaneous - In 2017, taxpayers who itemized were allowed to deduct miscellaneous expenses such as tax preparation fees, employee business expenses, management fees, job search costs, etc. over 2% of their AGI.
For 2018, no miscellaneous deductions are allowed.
Personal Casualty Loss - In 2017, you were allowed to deduct losses over $100/casualty + 10% of AGI.
For 2018, this deduction has been eliminated if it is not related to a federally declared disaster area.
Personal Exemptions/Dependents
In 2017, you got to deduct $4,100 for you, your spouse and your dependents.
For 2018, they have been eliminated. Yes, that's right you get $0 for you, your spouse and your kids. This change is due to the increase in the standard deduction. Congress made this change to simplify the tax law.
20% Pass-Through Tax Deduction
New for 2018! For Sole Proprietors, Partnerships, LLC and S Corporations, taxpayers get a 20% deduction of Qualifying Business Income. So if you make $100,000 in you business, you will get a deduction of $20,000 resulting in an AGI of $80,000. There are many limitations to this deduction as you may have guessed. The basic ones are the greater of 50% of wages the business paid to employees or 25% of wages the business paid to employees + 2.5% of qualified property (basically depreciable assets used by the business). There will be another post that gets into the details of this calculation as there are income limitations, business services etc. that are beyond the scope of this article.
Child Tax Credit
In 2017, you got $1,000 for each qualifying child under age 17.
For 2018, they have doubled the credit to $2,000. As much as $1,400 is refundable which means if you tax liability is $0 before this credit, you can get a check from the IRS for the $1,400.
Education Expenses
For 2017 and 2018, the American Opportunity Credit and the Lifetime Learning Credit are available.
However, the tuition and fees tax deduction was eliminated for 2018.
Moving Expenses
For 2017, you were allowed to deduct expenses for qualified moving expenses.
In 2018, this deduction has been eliminated.
Capital Gain Taxes
For 2017, capital gains that were short-term (stocks that were held less than 1 year) were taxed at your ordinary tax bracket. Long-term capital gains (stocks that were held 1 year or more) were either taxed at )0%, 15% or 20% depending on your tax bracket.
For 2018, the same holds true as last year with short-term gains taxed at ordinary tax rates and long-term gains at 0%, 15% or 20%. The 3.8% net investment income tax remains for high income tax payers.
If you have any questions or want to learn more, email barb@calc-you-later.com
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