Filing your 2018 Income Tax Return – Lots of Changes

If you haven’t already, it’s time to file your 2018 income tax return, but be prepared, there are lots of changes this tax season. The Tax Cuts and Jobs Act became law on December 22, 2018.  Listed below are the major changes that will affect your individual tax return. 

New Forms

IRS Forms 1040, 1040A and 1040EZ have been combined into one simplified individual tax return. The new design consists of a two-sided, half-page form. Some sections from the previous design were moved to supporting schedules.

Standard Deduction

Married taxpayers receive a much higher standard deduction of $24,000. In 2017, the deduction was just $12,700. For single taxpayers and married filing separately, the new standard deduction is $12,000 (compared to $6,350 in 2017). Heads of the household will get a standard deduction of $18,000, up from $9,550.

Since the standard deduction is so much higher, fewer taxpayers will be able to itemize deductions. The IRS estimates that millions of taxpayers will no longer itemize. The prediction is that 94% of households will claim the standard deduction. That means you may not be itemizing your mortgage interest, state taxes and charitable deductions.

Personal Exemption

You no longer will get a personal exemption. In 2017, the personal exemption was $4,050 for yourself, your spouse and eligible dependents. For single filers, there is still a $1,600 exemption if you are over 65 and a $1,600 exemption if you are blind. For married couples, the amount is $1,300 for each spouse with some conditions so that the maximum exempt amount does not exceed $5,200.

Top Income Tax Rate

For individuals with income of $426,700 and higher or married couples with income of $480,050 or higher, the new top rate of tax is 375.

In 2017, the seven tax brackets were 10%, 15%, 25% 28%, 33%, 35%, and 39.6%. For 2018, the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.

Child Tax Credit

This credit has been raised to $2,000 per qualifying child under 17.  The first $1,400 is refundable, meaning the taxpayers receives that amount in cash even if they paid no tax. In 2017, the credit was $1,000. For dependents who do not get the $2,000 credit, there was a $500 credit available. Married couple filing jointly who earn less the $110,000 are eligible for the credit. The limit is $75,000 for single and head of household filers.

Child and Dependent Care Credit

This credit remains unchanged. This can be up to $1,050 for one child under 13 or $2,100 for two children. $5,000 of income can still be sheltered in a dependent care flexible savings account.

Mortgage Interest

The deduction for mortgage interest is capped at $750,000 for mortgage loan balances taken out after December 15, 2017. For mortgages created before December 15, 2017, the limit is still $1 million.

State and local taxes

The deduction for state and local taxes is capped at $10,000.

Charitable Contributions

The deduction limit has been raised from 50% of adjusted gross income to 60%. Donations made to a college for the right to purchase athletic tickets are no longer deductible.

Medical Expenses

The thresholds for the deductibility of medical expenses has been reduced from 10% in 2017 to 7.5% for 2018.

Pass-through Deduction

For income earned from sole proprietorships, LLCs, partnerships and S corporation, there is a new deduction. Taxpayers with pass-through income will be able to deduct 20% of their pass-through income. If your small business generates $100,000 in profits in 2019, you will only pay tax on $80,000.

There are phase-out limits for professional service business owners like lawyers, doctors and consultants. Limits are $157,500 for single filers and $315,000 for married filing joint return.

These Deductions Have Been Eliminated

Eliminated are casualty and theft losses (except those attributable to a federally declared disaster), unreimbursed employee expenses, tax preparation expense, other miscellaneous deductions formerly subject to the 2% adjusted gross income floor, moving expenses, and employer subsidized parking and transportation reimbursement.

Obamacare Penalties

While efforts were unsuccessful to repeal the Affordable Care Act, known as Obamacare, the tax bill did repeal the individual mandate.  That means people who don’t buy health insurance will no longer have to pay a tax penalty. Note that this change doesn’t go into effect until 2019 so it still applies to your 2018 return.

Retirement Savings Limits in 2018

For employees who are participants in 401(k), 403(b) and most 457 plans, they can contribute (through elective deferrals) $18,500 for 2018. This is up $500 from 2017. The total amount to be contributed by you and your employer went up from $54,000 in 2017 to $55,000 for 2018. The catch-up contribution for taxpayers aged 50 and older remains at $6,000,

Contribution limits for IRAs are unchanged at $5,500 (plus a $1,000 catch-up contribution if you are 50 or older). If a retirement plan is available to the taxpayer through his employment, the $5,500 deduction for IRA contributions for single taxpayers phases out with Modified Adjusted Gross Income (MAGI) beginning at $63,000, fully phased out at $73,000. The deduction phases out for married filing jointly taxpayers between $101,000 and $121,000

The deduction limit for Roth IRAS for single taxpayers is unlimited with Modified Adjusted Gross Income (MAGI) up to $120,000 but the deduction phases out as it approaches $135,000. For married filing jointly the phaseout range is $189,000 to $199,000.

Alternative Minimum Tax

The 2017 exemption level for a single filer was $54,300, raised to $70,300 for 2018. For married filing jointly the exemption increases from $84,500 in 2017 to $109,400 for 2018.