Laws That Will Affect Your 2018 Tax Return

Congress has passed the largest piece of reform legislation in more than three decades. The Tax Cuts and Jobs Act (TCJA) went into place on the 1st of January, 2018. This means that the changes on this Act will affect the incomes of most taxpayers for the 2018 year. It may not be clear to some how the tax changes impact them. This article samples some of the major tax provisions in the new tax bill and how they could impact taxpayers.

Lower Tax Rates & Income Ranges

This Bill retains the seven tax brackets found in the current law but lowers a number of the tax rates. It also changes the income thresholds at which the tax rates apply. The current tax bracket: 10%,15%, 25%,28%,33%,35% and 39.6%. The new tax bracket will be: 10%,12%,22%,24%,32%35%,37%. Five of these new rates are lower. The income thresholds at which these brackets kick in have changed. Some who were in the 33% marginal tax bracket in 2017, will be in the 35% bracket in 2018. This change will mainly affect singles and heads of households with taxable income between $200,000 and $400,000.

Increase In Child Tax Credit

For families with children, your 2018 tax return will double the Child Tax Credit from $1,000 to $2,000 per child. Additionally, the amount that is refundable grows from $1100 to $1400. This means that one can collect it even if you don’t actually owe any federal income tax.

The TCJA adds a new, non-refundable credit of $500 for dependents other than children. This Bill also raises the income threshold at which these benefits phase out from $110,000 for a married couple to $400,000.

Increase In Standard Deductions

The new tax law almost doubles the standard deductions amount. Personal and dependent exemption deductions were eliminated. These could have been $4150 each for 2018. These deductions are particularly burdensome to those with a lot of dependents. The 2018 standard deduction amounts are as follows:

  • $12,000 for singles (up from $6350 from 2017).
  • $24,000 for married jointly-filing couples (up from $12,700)
  • $18,000 heads of households (up from $9350)

Additional standard amounts for the elderly and blind are allowed by TCJA, as under prior law. These increases means that fewer people will have to itemize. Today, approximately thirty percent of taxpayers itemize. However, this percentage is expected to decrease under the new law.

New Deduction Limits for State & Local Taxes

The bill limits the amount of state and local property income and sales taxes that can be deducted. The combined income of deductions is $10,000 or $5,000 if one is married and filling under separate status. Under prior law, itemized deductions could be claimed for an unlimited amount of personal state and local income and property taxes. This means that these taxes have generally been fully tax deductible. Under prior law, taxpayers could choose to forego any deduction for state and local income taxes. Instead, they would deduct state and local general sales taxes.

Under TCJA, taxpayers cannot deduct foreign real property taxes. As in prior law, they can choose to deduct state and local general sales instead of state and local income taxes. State and local general sales taxes are also subject to the overall $10,000/$5,000 limitations.

Alternative Minimum Tax Exemptions

This tax is triggered when taxpayers make more than the exemption and use common itemized deductions. This bill eases the burden of the individual AMT. The ease comes in by raising the exemptions and phase-out levels. As a result, AMT will affect two hundred thousand tax filers instead of the five million affected in 2017. AMT has only two tax rates; 26% on incomes that are below the AMT threshold and 28% on incomes above the AMT threshold.

For the 2017 tax year, the threshold was $187,800 for AMT taxable income or $93,900 for those married filling separately. In 2018, the threshold is $191,500 dollars for taxpayers filling as single and married filling jointly. It is $95,750 for married filling separately. Those who will still pay AMT will owe significantly less due to the TCJA changes.

New Limits on Home Mortgage Interest Deductions

This bill is applicable to mortgages taken out after December 15, 2017. TCJA reduces the mortgage debt used to acquire a first or second residence. Taxpayers can also claim itemized interest expense deductions. Under prior law, the mortgage debt limit was $1 million or $500,000 if you’re married and filed under separate status. For 2018-2025, the debt limit is $750,000 or $375,000 if you use married filing separate status. However, this change does not affect home acquisition mortgages taken out under binding contracts that were effective before December 16,2017.

The old law $1 million/$500,000 debt limits still apply to home acquisition mortgages that were taken out under the old law rules. However, this applies as long as the refinanced old principal does not exceed the old loan balance at the time of refinancing. TCJA disallows 2018 interest deductions for most home equity loans.

Healthcare Coverage

The bill eliminates the tax penalty for not having health insurance after December 31, 2018. It also temporarily lowers the floor above which out-of-pocket medical expenses can be deducted. This is from the current law floor of 10% to 7.5% for 2017 and 2018. This means that taxpayers can deduct medical expenses that are more than 7.5% of their adjusted gross income as opposed to the higher 10%.

Moving Expenses Tax Deduction

It used to be that if you could relocate to start a new job or seek work in another city, you could deduct some of your cost of moving. The TCJA eliminated this deduction, except in the case of certain military personnel.

Qualifying expenses include cost of packing and shipping belonging and cost of travel and lodging. Meals are not deductible as a moving expense. People who work outside the US then retire and move back to the US can deduct their moving expenses. This is despite that they would not start work at their new location. Under the TCJA, one can deduct moving expenses if their new job location is at least fifty miles further from their former home, than their old job location was.

New Limit on Itemized Deductions for Personal Casualty Losses

As of 2018, taxpayers can only deduct personal and non-business casualty losses if they are due to federally-declared disasters. Under the old tax law, you were able to reclaim an itemized deduction for property losses that are not reimbursed by insurers. These losses also would have to occur unexpectedly. This would include damage from fire, vandalism, accidents, theft and natural disasters. Like in the previous tax laws, one can deduct the losses to the extent they exceed ten percent of their adjusted gross income.

No More Miscellaneous Itemized Deductions

Starting with 2018 tax returns, taxpayers will not be able to deduct expenses such as union dues, investment fees or hobby expenses. Gambling losses and investment interest are examples of personal expenses that remain deductible. These miscellaneous itemized deductions were deductible up to over 2% of Adjusted Gross Income.

About the author

Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.