It’s that time of year again! As the joy of the holiday season comes to an end, we now turn to the joy of tax season – preparing the returns for 2017 and looking at what 2018 brings. Much is changing this year, as the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law late 2017. Here’s a roundup of what to expect for 2018. There’s a lot here, so feel free to skim through to what applies to you!
Tax Brackets:
The 2018 income tax brackets have received quite the makeover, as the TCJA kept seven tax rates but changed the rates themselves. The new brackets are more favorable than the old. See
below for the 2018 brackets for Married Filing Joint Taxpayers and Single
Taxpayers:
Itemized Deductions and Personal Exemptions: Deductions and exemptions may have
received the biggest changes from the tax law. The following changes have been
made to your Schedule A Itemized Deductions:
·
Cap
on state and local tax deductions at a combined $10,000.
·
Cap
on mortgage interest deductibility to the first $750,000 of debt principal (was
$1 mil.). This cap only applies to new mortgages
taken after December 15, 2017, not current
mortgage debt.
·
Interest
on any home equity debt not used to acquire, build, or substantially improve a
qualified residence is no longer deductible. The exact definition of deductible
“acquisition” debt depends on how the
funds are used. For example, a HELOC used to substantially improve a primary residence
is considered acquisition debt with deductible interest. However, a cash out
refinance of your mortgage to help pay off credit cards is not deductible. This
does apply to current home equity
debt. No grandfathering.
·
The deduction
limit for cash charitable contributions to public charities has been expanded
to 60% of adjusted gross income (AGI) from 50%.
·
All miscellaneous
itemized deductions have been eliminated.
·
Medical
expenses above 10% of your AGI are deductible. However, for 2017 and 2018 only, the floor has been scaled back to
7.5% of AGI.
The Pease limitation, which creates a phaseout for itemized
deductions of higher AGI earners, has been eliminated. But, it’s set to come
back in 2026.
Personal Exemptions have been entirely eliminated, and have been
combined into higher…
Standard Deductions: The repealed personal exemption amount has been consolidated
into a higher Standard Deduction. The amount has nearly doubled to $24,000 for
married couples filing jointly and $12,000 for individuals.
If you’re over 65 or blind, you can add an additional $1,300 to
your standard deduction ($1,600 for single filers).
Qualified Dividends and Capital Gain Tax Rates: Qualified dividends and capital gains
rates remain the same in 2018, however the tiers no longer line up neatly with ordinary
income tax brackets.
While ordinary income tax brackets have shifted (see above), the TCJA will use
old income thresholds for
preferential Qualified Dividends and Long Term Capital Gains. Here are the
brackets:
Personal Health Insurance: The individual mandate penalty for not having health insurance has been
eliminated by the TCJA. This is set to take effect in 2019, meaning you'll still face the mandate in 2018.
Roth IRA Contributions: The maximum Roth IRA contribution remains at $5,500 ($6,500 for
those who attain age 50 or older during 2018).
The Adjusted Gross Income (AGI) limit that disallows all direct contributions increased with inflation to $199,000 for Joint filers and $135,000 for Single taxpayers. Contributions begin to phase out at AGI of $189,000 for Joint filers and $120,000 for Single filers.
The Adjusted Gross Income (AGI) limit that disallows all direct contributions increased with inflation to $199,000 for Joint filers and $135,000 for Single taxpayers. Contributions begin to phase out at AGI of $189,000 for Joint filers and $120,000 for Single filers.
Retirement Account Contribution: The maximum 401(k), 403(b) and 457(Deferred Compensation)
contribution increased to $18,500 in 2018 ($24,500 for those who attain age 50
or older during the year).
Estate Tax Exemption: The Federal Estate Tax Exemption increased greatly from $5.49 million in 2017 to $11.2 million in 2018, making the total exemption for a married couple $22.4 million. The tax rate for amounts exceeding the exemption remains 40%.
Estate Tax Exemption: The Federal Estate Tax Exemption increased greatly from $5.49 million in 2017 to $11.2 million in 2018, making the total exemption for a married couple $22.4 million. The tax rate for amounts exceeding the exemption remains 40%.
Gift Tax Exemption: The annual gift tax exemption (amount that can be gifted
without requiring a gift tax filing) increased to $15,000 per recipient. Married
couples can “split” their gifts, making it $30,000 per recipient.
Social Security Benefits: Social Security and Supplemental Security Income (SSI) Benefits
will receive a 2% cost-of-living-adjustment (COLA) this year. While exciting,
Medicare again has a surprise . . .
Medicare Premiums: The standard premium for Medicare Part B remains the same at
$134 for those married filing jointly at $170,000 income or less ($85,000
single). The premium moves up depending on income. If you are a new enrollee in
2018 or do not have the premium deducted from your Social Security check, you
will pay the full standard premium.
However, if you are already receiving Social Security benefits and
had at least one premium payment deducted in the year, you’ve been “held
harmless” from the full amount of past premium increases. Instead, you’ve paid
an increased amount based on the Social Security COLA.
This year’s 2% increase in Social Security increases Medicare Part
B premiums by the same amount as well (up to the standard premium). This will
likely result in many people who were used to paying less than the $134
standard premium now paying that amount.
Child Tax Credit: This credit increased to $2,000 per qualifying child and is refundable up to $1,400. Phaseouts begin with AGI over $400,000 for joint
filers and $200,000 for single.
Business Tax Rates:
The highest corporate tax rate has been lowered permanently (until
the law is changed, that is) to a flat 21% from a high of 35%. The corporate AMT has been
repealed. If you’re the owner of a C-corporation, this tax break is for you.
Of even greater interest are the changes for pass-through business
entities (e.g., sole-props, partnerships, LLCs, or S-corporations). The income
of these businesses “passes-through” to the tax-returns of the shareholders. If
you’re an owner, you’ll find this income landing on your Schedule E (or Schedule
C for a sole-proprietor).
The new tax law gives a 20% deduction from the “Qualified Business
Income” (QBI) of pass-through businesses. Meaning, they will only be taxed on
80% of business income.
This deduction will not be an “above-the-line” deduction to
calculate your AGI, but it also won’t be an itemized deduction. Meaning, you
can claim it even if you take the standard deduction. There are exceptions to
the types of businesses that can claim, potential phaseouts based on your Taxable Income, and specifics on what constitutes QBI. This may be one of the more complicated portions of the tax changes, so check with
your tax professional.
The above explanation is summarized. It is not all inclusive. Please
confirm all specifics with your tax professional.
Follow our blog for additional tax tidbits throughout the year and
happy filing!
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