The tax reform legislation signed into law last December significantly changed the landscape for many individuals beginning January 1, 2018 through December 31, 2025. To help ensure you are prepared for the new challenges and opportunities, and while there is still time to make adjustments, we encourage you to contact us to set an appointment for a tax planning meeting before the end of the year.
Due to the elimination or limitation on itemized deductions, and the elimination of personal exemptions, a key consideration in planning for the upcoming tax season and future years is to look at ways to lower your taxable income. For example, consider maximizing all pre-tax contribution opportunities such as your 401(k) and deductible IRA contributions. You may also want to consider investing in state and municipal bonds (whose interest is exempt from federal tax).
Also, contrary to some headlines, due to the new restrictions on itemized deductions, it is still important for you to keep track of your medical expenses, mortgage interest, property and state income or sales tax payments and charitable contributions made during 2018.
Highlighted below are some of the more significant changes made by the tax reform legislation.
Check Your Withholding – IRS Tax Tables Changed
Many people calculated their 2018 W-2 withholding based on the IRS tax tables published following the tax law changes. However, the tables were changed mid-year. If adjustments were not made after publication of the new tables, individuals may go from a history of receiving a tax refund check to owing federal taxes– a very unpleasant surprise that we want to help you avoid.
Lower Individual Tax Rates
The legislation created lower individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate from 39.6% to 37%, respectively. (The pre-reform rates in effect before 2018 would be restored in 2026, i.e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively).
Modification of the Alternative Minimum Tax (AMT)
The legislation retained the AMT for individuals but increased the exemption amount and phase-out thresholds so fewer people will pay it. The new AMT exemption will apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption will begin to phase out at $1 million for joint filers and $500,000 for other taxpayers. These thresholds will be adjusted for inflation annually.
Increase in the Standard Deduction
The standard deduction increased significantly from $12,700 in 2017 to$24,000 for joint filers, from $9,350 to $18,000 for heads of households, and from $6,350 to $12,000 for singles. These amounts will be adjusted for inflation annually. Because you can claim the higher of the standard deduction or itemized deductions, you will want to closely compare the two methods as you may now benefit from the higher standard deduction given the many changes to itemized deductions.
Elimination of Personal Exemptions
In exchange for lower tax rates and increased standard deduction, personal exemptions may no longer be claimed.
Child and Dependent Credits
The reform legislation increased the value of the child tax credit from $1,000 to$2,000 per child under 17. As much as $1,400 of the credit will be refundable, thus allowing recipients to benefit even if they don’t owe taxes. You will need to provide your child’s Social Security number to claim the refundable portion. The legislation also expands eligibility for the credit by increasing the phase-out threshold to $400,000 of adjusted gross income (AGI) for joint filers (up from $110,000 under pre-reform law), with a threshold for all other filers set at $200,000. A $500 nonrefundable credit for dependents other than qualifying children will be available through 2025 (and no Social Security number is required).
$10,000 Cap on State and Local Tax Deduction
In a significant departure from prior law, the legislation allows individuals to deduct no more than $10,000 of any combination of the following taxes – state and local income taxes, state and local property taxes, and sales. This overall limitation may result in the enhanced standard deduction yielding a larger deduction against your adjusted gross income and thus a lower tax bill.
Limits on Mortgage Interest Deduction
The tax reform act reduced the amount of mortgage indebtedness on which taxpayers may deduct interest to $750,000 for mortgages incurred after December 15, 2017. (The $1 million limitation remains for older debt.) Interest on your principal residence and a second home are deductible, but interest on home equity indebtedness is not, regardless of when it was incurred.
Medical Expense Deduction
All individuals may deduct medical expenses for 2018 if the expenses exceed 7.5% of adjusted gross income, regardless of age. However, the AGI threshold returns to 10% of AGI in 2019 for all taxpayers, regardless of age. Again, you will need to review whether claiming such expenses, when combined with other allowable itemized deductions, yields a higher deduction than the standard deduction.
The legislation increased the AGI limitation on cash contributions from 50% to 60%, thus effectively allowing for an increased deduction. However, the reform act permanently repealed the 80% deduction for contributions made for university athletic seating rights, effective for contributions made after 2017.
Moving Expense Deduction
The deduction for moving expenses was eliminated except for individuals who are active duty members of the United States Armed Forces.
Elimination of Miscellaneous Itemized Deductions (including Unreimbursed Employee Business Expenses)
The reform act eliminated the deduction for miscellaneous itemized deductions. Thus, deductions subject to the 2% floor of AGI for costs related to the production or collection of income such as appraisal fees, investment fees, and safety deposit box rentals are not deductible. Importantly, expenses related to employment, such as uniforms, union dues, professional society dues, cell phone, computer used for work, and job-hunting expenses also are not deductible. Employees who incur significant unreimbursed business expenses may want to ask their employer about adjusting their compensation or establish an expense reimbursement plan that would allow the employer to reimburse the employee tax-free while also entitling the employer to a deduction against their business income.
The tax legislation repealed the above-the-line deduction for alimony paid for divorces or separations executed after December 31, 2018. After that date, alimony payments will not be included in the recipient’s income and the payments no longer will be deductible by the payor. If you are currently contemplating divorce or separation, a careful review of the effects of the new law should be undertaken to determine the economic effects on your tax situation and timing of any agreements.