2018 TAX REFORM SUMMARY
New tax legislation, the Tax Cuts and Jobs Act of 2017 (TCJA), was signed into law on December 22, 2017. It is the largest tax overhaul in 30 years. TCJA eliminated or modified numerous tax provisions starting in 2018. Most of the changes will apply for tax years after December 31, 2017 and before January 1, 2026, thus expiring for the 2026 tax year. We have provided some highlights for individual taxpayers below.
New Form 1040
The IRS has released a new “streamlined” Form 1040 for 2018 which includes two half pages. Page 1 of the new Form 1040 includes only informational data. Page 2 summarizes the typical totals of an income tax return. The 50 lines that were removed from the 2017 Form 1040 are now included on Schedules 1 - 6, if needed.
Income Tax Rates
In 2018, the top tax rate of 37% affects individuals whose income exceeds $500,000 ($600,000 for married taxpayers filing a joint return). Marginal tax rates for 2018 are as follows: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. While the tax rate structure remains similar to prior years (i.e., with seven tax brackets), the tax-bracket thresholds increased significantly for each filing status under tax reform.
Personal exemptions are eliminated for tax years 2018 through 2025.
The standard deduction for married couples filing a joint return in 2018 increased to $24,000 from $13,000. For singles and married individuals filing separately, it increased to $12,000 from $6,500, and for heads of household, increased to $18,000 from $9,550. The additional standard deduction for blind people and senior citizens in 2018 is $1,300 for married individuals and $1,600 for singles and heads of household. Note: With the increased standard deduction, many families that took the itemized deduction in previous years will now take the standard deduction.
Modified Itemized Deductions
· State and local income, property and sales tax paid in 2018 is limited to a $10,000 annual deduction.
· Deduction for interest on home equity indebtedness is disallowed unless used for the purchase of the home.
· Deduction for mortgage interest limited to debt up to $750,000 for married filing joint.
· The threshold for medical expense deduction is 7.5% for all taxpayers in 2018.
· Cash contribution deduction limitation was increased from 50% to 60% for cash contributions to public charities and certain private foundations.
Miscellaneous deductions exceeding 2% of AGI (adjusted gross income) are eliminated for tax years 2018 through 2025. As such, you can no longer deduct on Schedule A expenses related to tax preparation, investment management fees, job hunting, or unreimbursed employee expenses. Business owners are not affected and can still deduct business-related expenses on Schedule C.
Personal Exemption Phase-out
Both limitations on itemized deductions and personal exemption phase-outs have been eliminated under TCJA.
Estate and Gift Taxes
In 2018, there is an exemption of $11.18 million per individual for estate, gift, and generation-skipping taxes, with a top tax rate of 40 percent. The annual exclusion for gifts is $15,000.
Alternative Minimum Tax (AMT)
For 2018 exemption amounts increased to $70,300 for single and head of household filers, $109,400 for married people filing jointly and for qualifying widows or widowers, and $54,700 for married taxpayers filing separately.
Long-Term Capital Gain
In 2018 tax rates on capital gains and dividends remain the same as 2017 rates (0%, 15%, and a top rate of 20%); however, threshold amounts are different in that they don't correspond to the tax bracket structure as they did in the past. For example, taxpayers whose income is below $38,600 for single filers and $77,200 for married filing jointly pay 0% capital gains tax. For individuals whose income is at or above $425,800 ($479,000 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Kiddie Tax Modified
A minor’s earned income is taxed at single income tax rates and unearned income is taxed at trust and estate tax rates.
Flexible Spending Account (FSA)
A Flexible Spending Account (FSA) is limited to $2,650 per year in 2018 (up from $2,600 in 2017) and applies only to salary reduction contributions under a health FSA. The term "taxable year" as it applies to FSAs refers to the plan year of the cafeteria plan, which is typically the period during which salary reduction elections are made.
Expanded Use of 529 Account Funds
Funds may be withdrawn to pay for tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per student per tax year.
For 2018, the elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is $18,500 ($18,000 in 2017). For persons age 50 or older in 2018, the limit is $24,500 ($6,000 catch-up contribution).
Retirement Savings Contributions Credit (Saver's Credit)
In 2018, the adjusted gross income limit for the saver's credit for low and moderate-income workers is $63,000 for married couples filing jointly, $47,250 for heads of household, and $31,500 for married individuals filing separately and for singles. The maximum credit amount is $2,000 ($4,000 if married filing jointly).
Child and Dependent Care Credit
The Child and Dependent Care Tax Credit was permanently extended for taxable years starting in 2013 and remained after tax reform. As such, if you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Child Tax Credit and Credit for Other Dependents
For tax years 2018 through 2025, the Child Tax Credit increases to $2,000 per child, up from $1,000 in 2017, thanks to the passage of the TCJA. The refundable portion of the credit increases from $1,000 to $1,400 - 15 percent of earned income above $2,500, up to a maximum of $1,400. So even if taxpayers do not owe any tax, they can still claim the credit. Please note, however, that the refundable portion of the credit (also known as the additional child tax credit) applies only when the taxpayer isn't able to fully use the $2,000 nonrefundable credit to offset their tax liability.
Under TCJA, a new tax credit - Credit for Other Dependents - is also available for dependents who do not qualify for the Child Tax Credit. The $500 credit is nonrefundable and covers children older than age 17 as well as parents or other qualifying relatives supported by a taxpayer.
American Opportunity Tax Credit
For 2018, the maximum American Opportunity Tax Credit that can be used to offset certain higher education expenses is $2,500 per student, although it is phased out beginning at $160,000 adjusted gross income for joint filers and $80,000 for other filers.
Student Loan Interest
In 2018 you can deduct up to $2,500 in student-loan interest as long as your modified adjusted gross income is less than $65,000 (single) or $135,000 (married filing jointly). The deduction is phased out at higher income levels.