Did you hear that there are tax changes for 2018? Unless you’ve been in a coma or vacationing in North Korea over the last several months, you probably know that recent sweeping changes were made to the tax laws. However, you may not be sure how the Tax Cuts and Jobs Act and other tax changes will affect you in the upcoming year. We’re here to help you decipher some of the most important revisions.
Tax Brackets – For 2018, the seven tax brackets have been changed to 10%, 12%, 22%, 24%, 32%, 35%, 37% and the threshold values have also changed. Most taxpayers should see a decrease in their 2018 taxes as a result, and therefore see an increase in take-home pay once the withholding values have been adjusted sometime in January or February. Details on the new tax brackets and thresholds are available online.
Deductions and Exemptions – The standard deduction increases dramatically in 2018 to $12,000 for single filers and $24,000 for married couples filing jointly. It will be indexed through inflation through 2025. In 2026, the standard deduction will revert to the lower 2017 values, presumably re-indexed for inflation.
Meanwhile, the current personal exemption of $4,050 goes away entirely from 2018 through 2025 and re-appears in 2026. To offset the loss of the personal exemption, during that same time period, the Child Tax Credit will be doubled to $2,000 for each qualifying child, and a new $500 tax credit will be added for non-child dependents.
New limits from 2018 to 2025 will be placed on deductions for state and local taxes ($10,000), and mortgage interest deductions. The deduction limit on loan balances for newly purchased homes will be dropped to $750,000 and home equity loan deductions will be removed entirely.
Two deduction changes target wealthier taxpayers. The estate tax threshold will double to $11.2 million for individuals and $22.4 million for couples, while the collective limit on itemized deductions disappears until 2026.
Deductions that are disappearing completely in 2018 include tax preparation fees, moving expenses except for those in active duty service in the Armed Forces, casualty or theft losses not associated with a presidentially declared disaster, and unreimbursed employee expenses. The deduction for alimony payments remains in effect through 2018, but will disappear for those divorced in 2019 onwards.
Remember that these changes take effect in 2018 and affect your tax filing in April 2019 – not April 2018. The only major change that is retroactive is a change in the threshold for the medical expenses deduction, from 10% of adjusted gross income (AGI) to 7.5%. This change only applies to the 2017 and 2018 tax year, beyond which the 10% value applies.
Healthcare – Despite assertions that Obamacare is dead or dying, the Affordable Care Act still remains in effect and you will be charged a penalty for failure to provide proof of health insurance in 2017. The new tax law did remove the penalty for not having insurance (aka the individual mandate), but that does not take effect until the end of 2018.
Pass-Through Income – If you receive pass-through income through your business, starting in 2018, you may take advantage of a new tax deduction of 20% of your qualified business income (QBI). Some limitations and restrictions apply. Consult your tax preparer for the most up-to-date details.
Alternative Minimum Tax (AMT) – The AMT exemption limits rose to $70,300 for single filers and $109,400 for couples filing jointly, but the income thresholds at which the exemption amounts phase out were greatly increased to $500,000 and $1 million, respectively. The increase sunsets in 2025, but inflation-adjustment of the AMT becomes permanent.
Inflation Measurement – Tax brackets and thresholds are often inflation-adjusted, but the method of calculating inflation is changing. In previous years, inflation adjustments were made using the Consumer Price Index (CPI) for Urban Consumers. Moving forward, the IRS will use the Chained CPI – a measure that tends to rise at a lower rate. Over time, that may reduce the relative gains on tax credits and nudge people slowly toward higher tax brackets.
Few people enjoy keeping up with tax law changes. However, without keeping track of tax ramifications, you may miss out on ways to save on your taxes – from understanding the best way to use deductions and credits to making financial adjustments during the year to minimize your tax burden. Think of your efforts as continuing education, where the final payback is in dollars instead of a degree.
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