Tax Cuts and Jobs Act / Tax Reform - A Comprehensive Look at the New Rules for 2018
Brace yourself, the biggest change in 30 years in tax reform legislation has been passed for tax year 2018. Most changes will take effect in the 2018 tax year and others will take effect in 2019. Say goodbye to the forms you are used to seeing such as the double paged 1040 as well as the 1040a and 1040ez. All of these will now be replaced with a single page 1040 postcard. The postcard will not be sufficient enough for most people and supplemental schedules (6 new schedules) will have to be incorporated.
Below are some of the major changes that will impact the 2018 tax returns. Almost all of the 7 tax brackets have been widened and decreased by about 2% under the new rule. Full charts and more information could be viewed at:
The personal exemptions will be suspended through 2025. In prior years taxpayers reduced their adjusted gross income when they claimed personal exemptions. Many families would get an exemption for the filer, the spouse, and all dependents. In 2017, taxpayers deducted $4,050 per exemption. This amount was phased out for taxpayers with a higher adjusted gross income ($261,500 for single and $313,800 for married filing jointly).
The standard deduction will almost double what it was in prior years. Taxpayers have the option of either claiming the standard deduction or itemizing their deductions. The standard deduction is a set amount that depends on your filing status. The itemized deduction is calculated based on your mortgage interest, property taxes, charitable contributions, out-of-pocket medical expenses that exceed a percentage of your adjusted gross income, or uninsured losses from a theft or casualty. It is recommended that taxpayers calculate what their itemized deduction would be in order to see which option will yield a bigger deduction.
The child tax credit for children 17 years of age and younger doubles to $2,000 with $1,400 being refundable (meaning this can increase a tax refund amount) for children who have a social security number. There is a partial $500 non-refundable credit meaning it will lower your taxable income but will not go toward a refund check for qualifying relatives including aging parents and qualifying children without a social security number.
In prior years itemized deductions were phased-out once your income reached a certain limit. The rule for 2018 eliminates the phase out completely and you are now able to deduct the entire amount of itemized deductions. Other changes are included in the chart at:
Gains on the sale of your primary home are still excluded up to $250,000 ($500,000 if married filing jointly). However, the prior rule was that you had to have lived in the home at least 2 of the last 5 years before the sale in order for the gain to be excludable and can be claimed once every 2 years. The new rule for 2018 is for taxpayers (who sell their homes after December 31, 2017) to have lived in the home for 5 of the 8 years before the sale in order to claim the exclusion and it could only be claimed one time every five years.
In prior years taxpayers paying alimony and separate maintenance payments were able to deduct the amount from their income and recipients had to claim the alimony as income. The new rule, beginning in 2019, no longer allows the taxpayers who make these payments to deduct the amount from their income and taxpayers receiving these payments no longer have to include the amount in their income. Any divorce or separation whether signed or modified after January 1, 2019 will follow the new rule.
The alternative minimum tax (AMT) impacts higher-income earning families especially married filers, families with children, and taxpayers who live in high-tax states. If your taxable income and adjustments are higher than the exemption amount for your filing status then you will likely have to pay AMT tax. The AMT exemption amount is the amount a taxpayer can deduct from their alternative minimum taxable income in order to calculate their liability. The exemption phase-out means that once a taxpayer reaches the amount of the phase-out their exemption amount goes down (they will not be able to benefit from the full exemption amount). No exemption is allowed for taxpayers whose income exceeds the complete phase-out amount.
Self-employed and pass-through business owners income was subject to the regular personal income tax in prior years. Under the new rules, you can deduct 20% of the qualified business income of a U.S run sole proprietorship (reported on schedule C), rental activity (reported on schedule E) partnership, or S-corporation. Qualified business income excludes guaranteed payments to partners, reasonable owner compensation, and investment income (such as capital gains, dividend income, interest, etc.). Almost all businesses including engineering and architecture services qualify. The exception is for any “specified service trade or business” that meet certain income limitations and provide services in the following fields: accounting, health, law, actuarial science, consulting, performing arts, financial services, brokerage services, athletics, and any business whose principal asset is based on the skill of one or more owners or employees.
Qualified business equipment is eligible for a depreciation deduction up to $1,000,000. Larger depreciation deductions are possible for new and/or used passenger autos that are placed into service after December 31, 2017 and utilized over 50% of the time for business purposes. The new rule also allows heavier vehicles (gross vehicle weight above 6,000 pounds) that are used over 50% of the time for business to take a 100% first-year bonus deduction because heavy SUVs, vans, and pickups are treated as transportation equipment for tax purposes.
The tax penalty imposed on taxpayers for not having health insurance in prior years has been eliminated beginning in 2019.
In prior years, student loan debt discharged due to death or disability had to be included in income. The new rule beginning 2018 eliminates the requirement to include the amount discharged as income.
In prior years moving expenses were deductible if the move was made a certain distance away from the taxpayer’s prior home and the new home was closer to the place of full-time employment. The new rule beginning 2018 eliminates this deduction with the exception of certain members of the Armed Forces.
No change to the teacher’s deduction of up to $250 for unreimbursed teaching expenses. Electric cars purchased after 2010 are still eligible for a credit up to $7,500 (depending on their battery capacity). Student loan interest is still deductible up to $2,500.
Corporate tax rates in prior years had a four-step structure and the top tax rate was 35% for taxable income that exceeded $10 million. The new rule permanently drops the top tax rate to 21% for corporations.
Estate (“death tax”) and gift taxes are levied on large estates passed down to heirs. In prior years, there was an exemption for estates that had a value up to $5.49 million. The new rule beginning 2018 allows estates valued up to $11.2 million ($22.4 for married filing joint) to be exempt from tax. The annual gift exclusion amount was also increased from $14,000 in the prior year to $15,000 for 2018.
529 college savings plans are savings accounts with tax advantages which are made to promote savings for education expenses such as tuition. The money invested grows free of tax. In prior years these plans were only allowed to be used when paying for qualified higher-education costs. Under the new rules these plans can now be used to save for private K-12 schooling. Withdraws of up to $10,000 a year per student are now allowed and may be used to pay for elementary or secondary public, private, and religious school expenses.
The new rule in 2018 gives taxpayers more time for loan repayments to qualified plans such as a 401(k)’s that were taken out after December 31, 2017. In prior years taxpayers had 60 days after leaving a job to pay back a loan. In 2018, taxpayers have until the federal income tax return deadline (including extensions) to pay back a loan.
Beginning 2018, Roth IRA conversions can no longer be undone except in cases where contributions were made prior to income limits being met and you must undue because you are no longer eligible to contribute. Roth IRA’s and traditional IRA’s could be funded by making contributions annually up to $5,500 for taxpayers aged 50 and under or $6,500 for taxpayers aged 50 and older and cannot exceed your taxable compensation for the year. Conversions from a traditional IRA to a Roth IRA are taxable distributions. Tax-free withdrawals from Roth IRA’s are available. The account owner must be at least aged 59?, disabled, or dead and must have had at least 1 Roth IRA account that has been open for over 5 years (this begins on the 1st day of the tax year in which your first Roth IRA contribution is made). You can now leave your account untouched for as long as you live if you prefer and are no longer obligated to begin taking required minimum distributions from your Roth IRA account upon reaching age 70?.
ABLE (Achieving a Better Life Experience) accounts are programs designed for individuals with disabilities and do not interfere with benefits. In prior years the annual contribution limit was set at $14,000. The new rule for 2018 allows up to $15,000 to be contributed. If ABLE account owners also own a 529 college savings account they are now able to transfer funds from the 529 account into the ABLE account without getting penalized. Working individuals, depending on their gross income, are the only ones able to contribute amounts greater than the $15,000 limit to their own plan.
The non-refundable Saver’s Tax Credit (Retirement Savings Contributions Tax Credit) is now available to account holders who have made their own contributions into an IRA, employer-sponsored retirement plan, and to ABLE accounts if you are the designated beneficiary. In order to be eligible you must be 18 years of age or older, not a full-time student, and not be another person’s dependent. Rollover contributions do not qualify for the credit.
Kiddie tax applies to the unearned income (stocks, bonds, dividends, interest, cash, mutual funds, real estate, etc.) of children under 19 and/or children who are 19 through 23 and full-time students whose earned income doesn’t exceed half of the annual expense paid for their support. In prior years children were allowed to pay the tax at their own income tax rate up to $2,100 and all income above this amount was taxed at the parent’s higher income tax rate if it was higher than the child’s tax rate.
This material has been prepared for informational purposes only. Laws change periodically and the above information may not reflect the most recent changes. The article is not intended to provide and should not be relied on for, tax, legal or accounting advice. Please consult with a tax professional, legal, and/or accounting adviser before engaging in any transaction and for the most up-to-date advice.
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