2018 Taxes: What’s New?
The recently enacted federal Tax Cuts and Jobs Act marks a significant change for how you will plan for what you owe Uncle Sam. It’s perhaps the biggest reshuffling of the tax guidelines in the past 30 years. With so much that has changed, here are some essentials about the 2018 tax law that you need to know:
You might be in a whole new bucket
Under the new federal tax law, quite a few of the income tax brackets have changed. While that’s good news for many taxpayers, these changes could greatly impact your paycheck withholding. While the personal exemption has been eliminated, the standard deduction has been increased significantly. Forbes Magazine has a useful article detailing which tax brackets are affected along with other details.
Below are the changes to the key tax rates for 2018:
Say hello to your new friend: the standard deduction
In the past, many taxpayers tried to look for every little-itemized deduction they could take. For 2018, Congress made it harder to take itemized deductions in the new law and has effectively doubled the standard deduction.
The good news is that most major deductions have been retained. But the higher standard deduction in the new law means that itemizing as you have in the past might not make sense for some taxpayers.
Here is an example for a married couple: if you pay $8,000 in mortgage interest, have $4,000 in charitable contributions, and pay $5,000 in state and local taxes, you would have $17,000 in itemized deductions. Where itemizing previously made sense with the old $12,700 standard deduction in 2017, it doesn’t today with the new $24,000 standard deduction for married couples.
In fact, couples who filed jointly in the past can now file separately under their combined total income for all but the highest tax bracket. The benefit of removing the old marriage penalty is that this might push couples into a higher tax bracket and lower the total taxes owed to Uncle Sam.
The taxman giveth, the taxman taketh away
While there is good news in the new federal tax law, some common deductions that we have known and loved sadly bid us farewell:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Moving expenses
- Other miscellaneous deductions previously subject to the 2% AGI cap
- Employer-subsidized parking and transportation reimbursement
For example, individuals who relocate for their job won’t be able to deduct the move and related expenses under the new tax law. So, if a new job or a change in your current job forces you to relocate, you won’t be able to deduct moving costs, gas, hotels, meals, or other related expenses. Because Congress gave corporations a huge tax cut in the new law, the powers that be decided that business owners can incentivize their employees to move with their own finances.
Another sting has to do with divorced couples. Previously, alimony payments were tax deductible, and alimony received was treated as income. Starting in 2019, both provisions were eliminated for divorce decrees occurring after December 31, 2018. The bottom line: The alimony tax burden has now moved from the payee to the payor. Ouch.
Okay, but what can you still deduct?
If it sounds like taxes are now, well, simple (pro tip: they’re not), the astute taxpayer will find that many significant deductions, exclusions, and deferrals have been retained in the new tax law. Below are a few of the biggies:
Mortgage Interest. Homeowners can breathe a sigh of relief — you can still deduct your mortgage payments. The bad news is that there is a new cap on the amount you can deduct: $750,000, down from the $1 million cap in 2017. As a result, many fewer taxpayers will be able to itemize their deductions and take the mortgage interest deduction.
Medical expenses. If you were afraid to have an expensive medical procedure, the new tax law might encourage you. Where you once had to spend 10 percent of your adjusted gross income on medical expenses to qualify for this deduction, the threshold has been lowed for 7.5 percent in 2018. The bottom line: Because you can deduct more of your medical expenses from your 2018 taxes, hopefully, all those bills won’t hurt quite as much.
Medical Savings Accounts (MSA). For 2018, a high deductible health plan (HDHP) is one that, for participants who have self-only coverage in an MSA, has an annual deductible that is not less than $2,300 but not more than $3,450. For self-only coverage, the maximum out of pocket expense amount is $4,500. For 2018, HDHP means, for participants with family coverage, an annual deductible that is not less than $4,600 but not more than $6,850. For family coverage, the maximum out of pocket expense is $8,400.
Student Loan Interest. For 2018, the $2,500 student loan interest maximum deduction remains unchanged. In addition, phaseouts apply for taxpayers with modified adjusted gross income (MAGI) in excess of $65,000 ($135,000 for joint returns). This is completely phased out for taxpayers with modified adjusted gross income (MAGI) of $80,000 or more ($165,000 or more for joint returns).
Estate taxes. Previously a highly-taxed source of income, beneficiaries of an estate can now double their tax deduction.
Transportation and Parking Benefits. For employees or business owners who use a commuter highway vehicle, transit pass, or qualified parking for work, there is a tiny change, increasing by $5 for 2018. The fringe benefit is now $260. It’s pretty small, but we’ll take it.
Teacher school expenses. School teachers got some love this year, thanks to a vocal public. Originally, Congress considered removing deductions for school teachers who spend their own income on school supplies. That didn’t sit well with the public and the previous deduction was kept in place after members of Congress felt the people’s wrath. (Yay!)
Foreign Earned Income Exclusion. For tax year 2018, the foreign earned income exclusion inched up to $104,100 compared with $102,100 in 2017.
You won’t be penalized for not having health insurance. The controversial individual mandate penalty for the Affordable Care Act has been reduced to zero after 2018. While the elimination of the penalties does not technically remove the requirement to obtain healthcare coverage, beginning in 2019, the government will no longer enforce collection of the individual mandate penalties if an individual or family does not obtain healthcare coverage.
Could you get a raise? Maybe. The lavish corporate tax cuts will cause many companies to change their financial priorities. And some of the changes made by CFOs could benefit middle-class employees with modest increases in their paychecks. Fingers crossed.
Investors will be pleased. While nothing significant has changed on long- and short-term capital gains, your 2018 short-term capital gains tax could change because of the new tax brackets. For investors taking long-term capital gains, the previous tax rates of 0%, 15%, and 20% still apply. However, the way they are applied has changed slightly. Under previous tax law, the 0% rate was applied to the two lowest tax brackets, the 15% rate was applied to the next four, and the 20% rate was applied to the top bracket. Bottom line: You can keep more of what you got from your investments.
Pass the SALT. Some good news is that the state and local tax deduction (SALT) was retained in the new law. The not so good news is that the change limits the total deductible amount to $10,000, including income, sales, and property taxes.
Pass-through businesses win big. If you earn your money via a so-called pass-through business such as sole proprietorship, partnership, limited liability company (LLC), or S-corporation, it’s time to pop the champagne. Under the new law, taxpayers with pass-through businesses like these can deduct 20% of their pass-through income. In other words, if you own a small business and it generates $100,000 in profit in 2018, you'll be able to deduct $20,000 of it before the ordinary income tax rates are applied. For many taxpayers, this deduction is phased out with an Adjusted Gross Income of $315,000–$415,000 for joint returns and $157,500–$207,500 for single returns.
What about families?
Two big changes in the new tax law will have a big change for families:
Child Tax Credit. First, the bad news: The personal exemption is going away. If you have a larger family, that could affect your tax situation disproportionally. Now the good news: The Child Tax Credit (available for qualified children under age 17) has been doubled to $2,000, and this could more than make up the difference. In addition, the tax credit is now refundable to $1,400.
529 accounts aren’t just for college anymore. A 529 account is a tax-advantaged education savings plan originally designed to help parents save for their child’s future college tuition. The new tax law now allows families to also use a 529 account to help pay for K-12 public, private, and religious school tuition along with post-secondary education costs. A 529 account can now be used to pay for up to $10,000 of primary and secondary education per school year.
Rich man, poor man
It’s good to be king. If you live in the rarified air of the top tax brackets, your taxes have been lowered dramatically under the new law. Congress believes that the top earners are also the top job creators. Taking their reasoning further, they believe that by lowering the taxes for high net worth individuals, some of that blessing could trickle down to other Americans in the form of new jobs and increased wages.
If your income is more modest, you may find that your tax bracket has changed. For low-income taxpayers, the new tax law changes won’t have much effect at all although potential budget cuts to some government entitlement programs you depend on could really affect you.
Funding for many federal entitlement programs is mandatory, requiring Congress to allocate for them in the budget. However, there is concern that lawmakers could propose changes to separate laws governing things such as eligibility and the amount of benefits paid. This, in turn, could reduce overall federal spending on programs such as the Children's Health Insurance Program (CHIP).
What should you do next?
These are but a few of the many changes in the 2018 tax law. While some new changes in the law such as the increased standard deduction promise to simplify things for individual and business taxpayers, the federal tax code is still complex enough to make most people’s heads explode. Just as important, understanding the many subtle changes in the new tax code can dramatically affect what you pay to Uncle Sam. That’s why working with a trusted and experienced partner who is an expert on tax regulations can make a big difference to your financial security.
The tax team at Ross-Stern & Associates have immersed themselves in understanding the new laws. Getting an early start on your tax planning can help you get the upper hand in minimizing the impact and maximizing the outcome of what you may owe in federal taxes. Contact us today or call 818.776.0399 to get started.