As we quickly approach the 2018 income tax filing season, you may be wondering how the Tax Cuts and Jobs Act (TCJA) may affect your tax return. Here are some items that will affect the majority of taxpayers this year:
Reduced Tax Rates – Lower individual tax rates – 10%, 12%, 22%, 24%, 32%, 35% and 37% for tax years 2018-2025. Everyone will benefit from this reduction in our tiered tax system. The brackets have also expanded so more income will be taxed at lower rates.
Capital Gain Rates – No change to these rates from the prior tax law. The capital gains rates still range anywhere from 0% to possibly upwards of 23.8% with the most common rate being 15%. The amount of income that can be taxed at 15% has also increased. There are still planning opportunities for taxpayers to qualify for the 0% rate.
Historically, taxpayers have the option of using the higher of your standard deduction or itemized deductions. This is still true in 2018.
The standard deduction almost doubled for taxpayers for 2018. The married filing joint deduction is now $24,000, while the single deduction is now $12,000. The extra deduction for the elderly or blind still exists and are slightly higher than 2017.
Itemized deductions still include things like taxes, mortgage interest, medical deductions and charitable deductions.
Taxes paid for property taxes, state income taxes, and state sales taxes are now capped at a cumulative $10,000 per year.
Charitable donations are still deductible. The limit for charitable donations increased from 50% of AGI (adjusted gross income), to 60% starting in 2018.
Other miscellaneous itemized deductions such as unreimbursed employee expenses, investment expenses and most legal fees were eliminated.
Mortgage interest is still deductible, while line of credit or home equity lines of credit (HELOC) have many more rules placed on them. In general HELOCs are now required to be used for purchasing, building or improving your first or second home and be secured by that property to be deductible. We aren’t intentionally being nosey about your exciting life when we ask a lot more questions about your HELOCs. There were also changes to the limit of the mortgage indebtedness that allows the interest to be deductible as well. Those taxpayers with a very high mortgage balance should know this may affect them.
Child Tax Credit – This doubled to $2,000 per child under age 17 and a new $500 credit added for those over age 17. The phase out income limits on a MFJ return also went from $110,000 AGI up to $400,000, so many more taxpayers will qualify for this credit now.
Moving Expenses – eliminated for all but some armed forces moves.
529 Plans – funds can now be used for secondary or elementary private schooling up to $10,000 per year.
Roth IRA’s – no longer allowed to do a “re-characterization” of Roth IRA conversions, so be sure that is what you intend to do and you have the potential funds to help pay the tax on the conversion.
Section 1031 Exchanges – in general exchanges of any personal property is not allowed to be reported as an exchange any longer. Real property still qualifies to be exchanged under the previous Section 1031 rules.
Estate Tax Exclusion – effective January 1, 2019, the exclusion for decedents is $11,400,000. The FMV date of death basis rules remain in effect.
Qualified Business Income Deduction (QBI) – the TCJA created a new deduction for individual taxpayers who have QBI. This deduction is generally equivalent to 20% of the taxpayers qualified business income. See your tax professional for more specific information.
Health Insurance Penalty – The penalty for not having health insurance was eliminated beginning after December 31, 2018. All other surcharges and penalties related to the ACA remain intact at this point in time.
Entertainment Expenses – Eliminated in the TCJA for 2018 and forward. Think things like box seats, Professional athletic event tickets, concert tickets, etc.
Meals Deduction – After many questions about the change to this rule in the law, it appears that qualified business meals still qualify as an expense, along with employee appreciation meals, or meals for the convenience of the employer. The rules stayed the same for the documentation requirements of these meals and they continue to be subject to a 50% limitation.
This is not an all-inclusive list, but a brief reminder of the things that may affect your tax filings for 2018 and items you should discuss with your tax preparer.