2018 Tax Changes Explained - Tax Tips and Best Practices
2018 Tax Tips and Best Practices
The 2017 tax filing season is behind us and now is the time to plan for the 2018 tax season. The Tax Cuts & Jobs Act, signed into law on December 22, 2017, drastically changed the American tax code. Among the most notable changes are:
- Increases to Standard Deductions
- Suspension of the Personal Exemption
- Changes to Itemized Deductions
These changes go into effect January 1, 2018 and are effective until December 31, 2026. Let’s go over each change and review 2018 tax tips and best practices now. As always, if you have any questions we are happy to help. Contact us today to schedule your free tax consultation.
Standard Deduction Increased
The standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018.
These amounts are nearly double the 2017 standard deduction amounts (i.e., $12,700 for married individuals filing jointly, $9,350 for head-of-household filers, and $6,350 for all other taxpayers).
We’ve created a 2018 Tax Guide that summarizes these standard deduction amounts.
Personal Exemption Suspended
The personal exemption deduction is temporarily suspended by reducing the amount to zero. For 2017, the personal exemption deduction was $4,050. However, this was subject to a phase-out beginning with adjusted gross incomes of $313,800 for married individuals filing a joint return and $261,500 for single taxpayers, and was completely phased out for $436,300 for married individuals filing a joint return and $384,000 for single taxpayers.
This will have an adverse effect on married individuals with more than 1 dependent because the increase in the standard deduction will not cover the loss of taking 4 or more personal exemptions.
This is best explained with an example:
Prior to the Tax Cuts & Jobs act, a married couple with 2 children under the age of 18 (dependents) using the standard deduction would be able to reduce their taxable income by $24,850. After the Tax Cuts & Jobs act, this same family would only be able to reduce their taxable income by the new standard deduction of $24,000.
The takeaway here is the more dependents you have the greater the impact this will have on your tax situation for 2018.
Expansion of Itemized Deductions
Threshold on Medical Expense Deductions Decreased
The threshold on medical expense deductions is reduced from 10% of adjusted gross income (“AGI”) to 7.5% of AGI for all taxpayers for 2018. Additionally, the rule limiting the medical expense deduction for alternative minimum tax (“AMT”) purposes to 10% of AGI does not apply to 2018 as well. The 10% of AGI threshold will be reinstated for 2019 and subsequent years.
Increase in Charitable Contribution Deductions
The 50% of AGI limitation for cash contributions to public charities and certain private foundations is now increased to 60% of AGI. If your contributions exceed the new 60% limitation, you will still be eligible for a deduction, but will need to carry them forward into the next tax year. You will be able to carry them forward for up to five years.
Suspension of Phase-Out of Itemized Deductions
The phase-out of itemized deductions (i.e., “Pease” limitation) is temporarily suspended.
Limitations on Itemized Deductions
Limitations on State and Local Tax Deduction
Taxpayers are limited to claiming a state and local tax deduction of up to $10,000 ($5,000 for married taxpayers filing separately) for the aggregate of: (i) state and local property taxes (i.e., those reported on Schedule A, not on Schedule C or as part of a business) and (ii) state and local income or sales taxes paid or accrued in the tax year (i.e., those state taxes withheld from your paycheck).
For taxpayers subject to the AMT, some or all of the benefit of the state and local tax deduction may have been eliminated in previous years, so the limitation on the deduction in 2018 may not have a material impact on their tax liability.
Limitations on Mortgage and Home Equity Indebtedness Deductions
The deduction for home equity indebtedness is temporarily suspended, and the deduction for home mortgage interest is limited to underlying indebtedness of up to $750,000/$375,000 for married taxpayers filing separately. However, for tax years beginning after December 31, 2025, the $1,000,000/$500,000 limitations under prior law are restored, and taxpayers may claim acquisition indebtedness up to these amounts regardless of when the indebtedness was incurred.
However, if you had any acquisition indebtedness (i.e., home mortgage) incurred before December 15, 2017, good news you’re grandfathered in and the lower limits don’t apply to you.
Also more good news, the lower limitations don’t apply to taxpayers who refinance existing qualified residence indebtedness that was incurred before December 15, 2017, so long as the principal balance of the new loan does not exceed the principal balance of the old loan at the time of refinancing.
It is also worth noting that the suspension of the interest deduction on home equity indebtedness only applies to home equity loans not used for the purchase or renovation of your home. Home equity used for these purposes is classified as acquisition indebtedness and follows the limits stated above. Examples of non-deductible home equity indebtedness include paying off credit card debt, paying off student loans, or buying a new car.
Suspension of Miscellaneous Itemized Deductions Subject to 2% Floor
The deduction for miscellaneous itemized deductions subject to the 2%-of-AGI floor is temporarily suspended. Example of miscellaneous itemized deductions subject to the 2% floor include: investment expenses, appraisal fees (for charitable donations or casualty losses), indirect miscellaneous deductions of pass-through entities, safe deposit box fees, tax preparation fees, trust administration fees, union dues, and unreimbursed business expenses.
For taxpayers subject to the AMT, a portion of this deduction may have been eliminated in previous years, so the suspension of this deduction in 2018 may not have a material impact on their tax liability.
2018 Tax Tips and Best Practices
So, how do all of these changes impact you? Below are several key points to consider in the year ahead:
- Virginia residents and other low taxed states should experience a limited impact from the limitation of the state and local tax deduction as the increase in tax liability will generally be offset by the overall decrease in federal tax rates and the suspension of the phase-out of itemized deductions.
- Taxpayers who are limited in claiming the state and local tax deduction may consider making charitable contributions to certain charities that provide state income tax credits. Doing so will effectively shift your state income tax deduction to a charitable contribution deduction. If you haven’t already, use our 2018 Tax Guide as a quick reference.
- Taxpayers who no longer have a mortgage on their home may find that they qualify for the standard deduction but for their charitable contributions. Such taxpayers should consider “bunching” their charitable contributions in certain years and claiming the standard deduction in other years. Establishing a Donor Advised Fund will help you to effectively “bunch” your charitable contributions while still providing cash flow to charities on a regular giving basis. Think of a Donor Advised Fund like a charitable savings account.
- Taxpayers who regularly deducted unreimbursed business expenses as miscellaneous 2% itemized deductions should work with their employer to be reimbursed directly for such expenses, as they will no longer provide any tax benefit.
- Work with a dedicated tax professional to implement a strategic plan for your business or personal taxes. There is a significant amount of change and partnering with a professional will help you maximize your tax benefit. Contact Marek CPA & Associates for a free consultation.