A new year brings new tax
laws. The only thing constant in tax
world is change. Here are some notes to give you some idea on how the new tax
laws affect you.
Personal
Exemptions – (See 1040 Line 42, 1040A Line 26) In
prior years you are able to claim exemptions for yourself, spouse, and any
dependents, but in the new law there are no deductions for personal exemptions.
Standard
Deductions – (See 1040 Line 40, 1040A Line 24)
Generally speaking, if you normally file using standard deductions, then the
new tax laws are likely favorable for you. Taxpayers can take a standard
deduction or itemize their deductions whichever provides a larger benefit.
Under the new tax law, the standard deduction amounts are almost doubled, and
the itemized deductions allowed have been scaled back. The chart below
illustrates the standard deductions by filing status for 2017 and the amounts
under the new law for 2018.
FILING
STATUS
|
2017
|
2018
|
||
Single & Married separate
|
$6,350
|
$12,000
|
||
Head of household
|
$9,350
|
$18,000
|
||
Married filing joint
|
$12,700
|
$24, 000
|
||
Additional:
ELDERLY & BLIND
|
||||
Joint /Surviving spouse
|
$1,250
|
$1,300
|
||
Others
|
$1,550
|
$1,600
|
Itemized Deductions – (See 1040 Schedule A) Let’s look at some changes to
various itemized deductions.
- Medical Deductions – (Schedule A – Line 4) Individuals can still deduct their medical expenses to the extent they exceed a percentage of their income (AGI). This income limit has been reduced from 10% to 7.5% of AGI for years 2017 and 2018 and returns to 10% in 2019.
- Taxes – (Schedule A – Line 9) In the old law, taxpayers were allowed to deduct state and local income taxes, or sales tax if larger, real property taxes, and certain personal property taxes. You can still deduct these under the new law, but here is the catch - the overall tax deduction is limited to $10,000.
- Home Mortgage Interest – (Schedule A – Lines 10-12) In past years, a taxpayer could deduct the interest on up to $1 million of acquisition debt for the purchase of the taxpayer’s first and second homes. In addition, taxpayers were allowed to deduct the interest on up to $100,000 of home equity debt. The new law reduces the $1 million limit on home acquisition debt to $750,000 ($375,000 for married separate filers) for first and second homes, except the lower limit won’t apply to indebtedness incurred before December 15, 2017. That is, the $1 million cap continues to apply to acquisition mortgages on a primary and second residence already in existence prior to December 15, 2017. However, starting with 2018 returns, the new law does not permit a deduction for any equity debt, which can have an adverse impact on individuals who have used their home equity to pay for costs of tuition, travel, cars, and other purposes.
- Donations to Charities – (Schedule A – Line 19) The only change here was that it increased the general 50% of income (AGI) limit on charity deductions to 60%.
- Casualty and Theft Losses – (Schedule A – Line 20) There will be no personal casualty losses will be allowed in 2018 except those incurred in a federally declared disaster area.
- Job Expenses and Certain Miscellaneous Deductions – (Schedule A – Line 27) This category is no longer deductible under the new tax law.
Tax
benefit for parents -Taking away exemptions deductions for
dependents doesn’t seem fair for large families. However, this loss and more should be made up for by the
expanded Child Tax Credit, which is available for qualified children under age
17. Specifically, the bill doubles the credit from $1,000 to $2,000, and also
increases the amount of the credit that is refundable to $1,400.
In addition, the phaseout threshold for the credit is dramatically
increasing.| Tax Filing Status | Old Phaseout Threshold | New Phaseout Threshold |
| Married Filing Jointly | $110,000 | $400,000 |
| Individuals | $75,000 | $200,000 |
Data source: Tax Cuts
and Jobs Act.
Furthermore, the Child and Dependent Care Credit, which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable. You can't use both of these breaks to cover the same child care costs, but with the annual cost of child care well over $20,000 per year for two children in many areas, it's safe to say that many parents can take advantage of these credits, both of which remain in place.
Education Credit
Earlier versions of the tax bill called for reducing or eliminating some education tax breaks, but the final version does not. Specifically, the Lifetime Learning Credit and Student Loan Interest Deduction are still in place, and the exclusion for graduate school tuition waivers survives as well.
One significant change is that the bill expands the available use of funds saved in a 529 college savings plan to include levels of education other than college. In other words, if you have children in private school, or you pay for tutoring for your child in the K-12 grade levels, you can use the money in your account for these expenses.
Affordable Care Act
I almost forgot to mention that about the Obama care penalties. Although, the attempt to repeal the Affordable Care Act was unsuccessful, the new tax reform bill repeals the individual mandate, meaning that people who don't buy health insurance will no longer have to pay a tax penalty.
It's worth noting that this change doesn't go into effect until 2019, so for 2018, the penalty can still be assessed.
Depending on where you sit within the tax brackets
below, the new tax laws could either be a yay or a nay for you. While everyone
might benefit one way or another, the most part of the benefits go to the
higher income bracket and more so to businesses as opposed to individuals. The
tax brackets reverts back to current level by 2026, however, the business tax
cuts are more permanent.
Rate
|
Individuals
|
Married Filing Jointly
|
Head of HH
|
10%
|
Up to $9,525
|
Up to $19,050
|
$0 to $13,600
|
12%
|
$9,526 to $38,700
|
$19,051 to $77,400
|
$13,600 to $51,800
|
22%
|
$38,701 to $82,500
|
$77,401 to $165,000
|
$51,800 to $82,500
|
24%
|
$82,501 to $157,500
|
$165,001 to $315,000
|
$82,500 to $157,500
|
32%
|
$157,501 to $200,000
|
$315,001 to $400,000
|
$157,500 to $200,000
|
35%
|
$200,001 to $500,000
|
$400,001 to $600,000
|
$200,000 to $500,000
|
37%
|
over $500,000
|
over $600,000
|
$500,000 and up
|
Data
Source: Tax Cut and Jobs Act
This article does not cover all the changes under the
new tax laws, including some business changes, such as new deductions for
qualified businesses whether it be a Sole Proprietor, Partnership, or
S-Corporations. Contact me at DB Tax Solutions, telephone 252-425-6724 if you
need help with your tax return or tax planning. Visit my website for more
information at www.dbtaxsolutions.blogspot.com