We are officially in full “tax season” swing. Most of you are probably gathering all your documents, some of you may have already delivered the goods to your accountant, heck, some of you may have already filed and got your return (you overachievers!). However, one thing is certain, this tax year looks different than tax years of the past as it’s the first year that the new Tax Cuts and Jobs Act has taken effect.
For starters, the actual tax return is different. The tax return itself has been re-designed with the prior double-sided single page replaced with two half-pages augmented with more supplemental schedules.
While many of us trust our Certified Public Accountants (CPA), accountants, and TurboTax to handle the technical jargon, I wanted to walk through some of the major changes for 2018. Technically, from 2018 to 2025 if you are keeping score at home.
Let’s get started!
Probably one of the most important parts of the tax return. If you don’t itemize your deductions, this is likely your single biggest deduction to your taxable income on your tax return.
For 2018, the standard deduction for most will nearly double. Individuals will see their standard deductions rise to $12,000; for heads of household, it rises to $18,000; and for married couples filing jointly, the standard deduction increases to $24,000.
For comparison, here were the past figures from 2017, the standard deduction was $6,350 for single individuals, $9,350 for heads of household or $12,700 for married couples filing jointly.
While the standard deduction was lower in 2017, you still had personal exemptions which we will cover next.
In the past, a taxpayer could reduce their adjusted gross income (AGI) by claiming personal exemptions — generally for the taxpayer, their spouse, and their dependents.
Taxpayers were able to deduct $4,050 per exemption in 2017. The deduction was phased out for taxpayers earning more than certain AGI thresholds. The phase-out had been at an AGI over $313,800 for married couples filing jointly, $287,650 for heads of household, $156,900 for married couples filing separately and $261,500 for all other taxpayers.
For 2018, all personal exemptions have been suspended through 2025.
So all things being equal, if you have a husband and wife filing their tax return in 2017, they were eligible for two personal exemptions ($8,100) and the standard deduction ($12,700). For a total deduction of $20,800. In 2018, their standard deduction will be $24,000 but no standard deductions. So, in this overly simplified calculation, this seems to be an improvement for our sample client.
This explanation is better served with a picture. As a friendly reminder, we use a marginal tax bracket system in his country, which means that you don’t jump from one tax bracket to the next. As you enter new tax brackets, only the dollars above the last threshold are taxed at that higher rate.
For 2018, The new rules retain seven tax brackets, but the brackets have been modified to lower most tax rates. The new brackets expire in 2027. Keep in mind that the majority of individual income tax changes would be temporary, expiring in 2025.
Top income earners — above $500,000 for individuals and above $600,000 for married couples filing jointly — falls from 39.6 percent to 37 percent.
In the past, there were also seven tax brackets. The rate on the highest earners is 39.6 percent for taxpayers earning above $418,400 for individuals and $470,700 for married couples filing taxes jointly.
(their graphic designer must have been on vacation…)
Child Tax Credit
This one also had a pretty good revamp. Finally, we get some money back for those little bundles of expenses, I mean joy, bundles of joy!
For 2018, the child tax credit doubles to $2,000 per qualifying child, and up to $1,400 of the child tax credit can be received as refundable credit (meaning it can go toward a tax refund). The new rule also includes a $500 nonrefundable credit per dependent other than a qualifying child. This rule/update is in effect through 2025.
The credit begins to phase out at an AGI over $200,000 for other taxpayers and for married couples, the phase-out starts at an AGI over $400,000.
In the past, the child tax credit was only $1,000 and the AGI limits were much lower. The credit was reduced by $50 for each $1,000 a taxpayer earns over certain thresholds. The phase-out thresholds started at a Modified Adjusted Gross Income (MAGI) over $75,000 for single individuals and heads of household, $110,000 for married couples filing jointly and $55,000 for married couples filing separately.
It was also a nonrefundable credit through 2017. So it could reduce your tax burden, but anything left over was not eligible for a refund. Essentially the money would disappear.
Many of these updates were pretty substantial, so I guess I don’t have to say it every time, but this one definitely changes financial planning with a few key updates.
For 2018, new homeowners can include mortgage interest paid on up to $750,000 of principal value on a new home in their itemized deductions.
If you bought your home on or before 12/15/17 or refinanced (as long as new mortgage amount does not exceed the amount of debt being refinanced.), the old, $1 million cap continues to apply.
There was also a very important change to home equity loans, you can deduct interest paid on a home equity line of credit or home equity loan, so long as the loan was used to buy, build or substantially improve your home. However, if the loan was used for anything else (credit card consolidation, little Suzie’s Harvard education, etc.), you can NO longer deduct that interest.
These changes are set to expire after 2025.
In the past, the mortgage limit was $1,000,000 and you could deduct the interest on up to $100,000 on a home equity loan.
State & Local Taxes
Assuming you don’t live in a cave, this was the big news with the 2018 tax code changes. These are known as “SALT,” and for individuals in high-income tax states or cities, this could have a huge effect on your 2018 taxes. This is the change that has played a role in peoples’ decision.
Simply put the old rule had no limits, you were able to include state and local property, income and sales taxes as itemized deductions.
For 2018, Taxpayers are now limited to claiming an itemized deduction of $10,000 in combined state and local income, sales and property taxes, starting in 2018 through 2025.
Pro Tip: If you itemized your deductions in 2017, go to your Schedule A and at the top of the page you will see this, “Taxes You Paid.” Line 9 shows your total in combined state and local income, sales and property taxes. If that number is over $10,000, you itemized deductions will be lower in 2018 if all things stay the same.
Other Important Updates
Estate Tax: In the past, you had to be pretty wealthy to worry about the federal estate tax. The old limit was $5.49 million. And now (2018), you have to be twice as wealthy with a new limit of $11.2 million.
This is good news because it removesfor many. And let's be honest -- if you are still worried about complex estate planning, you are doing just fine!
Moving Expenses: In the past, I never gave this rule too much thought, however, now that we work with so many medical professionals who seem to move across the country at least three times for residency, fellowship and becoming an attending physician, it was a bummer to see this change.
In the past, the moving expense could be deducted as long as you moved a certain distance. Unfortunately, for 2018, these deductions have been suspended until 2025. Certain moving expenses can still be deducted for members of the military.
Student Loan Discharge: Believe it or not, if you had student debt discharged due to death or disability in the past, it was taxed as income. Yes, strange and sad. However, for 2018, it will not be taxed if the discharge occurs due to death or disability. This rule lasts to 2025.
Miscellaneous Tax Deductions:
- Tax preparation: Taxpayers may not claim tax-preparation expenses as an itemized deduction through 2025.
- Work-related expenses: The bill suspends work-related expenses as an itemized deduction through 2025.
- Investment fees: Under the new rules, the investment fee deduction is suspended until 2025.
- Bicycle Commuting: The saddest change for all my fellow bike riders…. We can no longer deduct the $20/m in qualified commuting reimbursements.
There you have it -- the biggest updates to your taxes for 2018 through 2025 (for most). My goal was to keep the technical jargon out of this article because we all know taxes are complicated and boring as all heck.
Tax Deadline for 2018 is Tuesday, April 15 by Midnight!
We hope you enjoyed this post! And as always, you should speak to your CPA or accountant for your specific tax questions and details. While I enjoy the tax code and tax planning, I am not a tax expert.