Important 2018 Tax Law Changes for Individuals

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As many taxpayers are busy trying to get their 2017 taxes filed before the October 15 extension deadline, now is a great time to start thinking about how recent tax law changes might affect your specific tax situation for 2018. Preparing for these changes now could save you time and money in the months ahead!

The Tax Cuts and Jobs Act (TCJA) – arguably the largest overhaul of the U.S. tax code since the Reagan era – was enacted into law this year. The bill contains many provisions affecting both individuals and businesses. Some of these were expected while others may have a significant impact on credits, deductions and even which tax bracket you’re in.

Below are some of the most important changes affecting your personal taxes under the new law. Except where otherwise noted, all of these provisions went into effect on January 1, 2018 and do not apply to your 2017 taxes.

Changes to individual tax rates and brackets. For 2018 through 2025, the TCJA retains seven tax rate brackets. However, six of the rates are lower than before. The tax brackets are as follows:

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Standard deduction amount increased. For 2018, the standard deduction amount has been increased for all filers, and the amounts are as follows.

  • Single or Married Filing Separately—$12,000.

  • Married Filing Jointly or Qualifying Widow(er)—$24,000.

  • Head of Household—$18,000.

Due to the increase in the standard deduction and reduced usage of itemized deductions, you may want to consider filing a new Form W-4.

Deduction for personal exemptions suspended. For 2018, you can’t claim a personal exemption deduction for yourself, your spouse, or your dependents.

Changes to itemized deductions. For 2018, the following changes have been made to itemized deductions that can be claimed on Schedule A.

  • Your itemized deductions are no longer limited if your adjusted gross income is over a certain amount.

  • You can deduct the part of your medical and dental expenses that is more than 7.5 percent of your adjusted gross income.

  • Your deduction of state and local income, sales, and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if married filing separately).

  • You can no longer deduct job-related expenses or other miscellaneous itemized deductions that were subject to the 2 percent of AGI floor. You may still deduct certain other items on Schedule A, such as gambling losses.

  • For indebtedness incurred after December 15, 2017, the deduction for home mortgage interest is limited to interest on up to $750,000 of home acquisition indebtedness. This new limit doesn’t apply if you had a binding contract to close on a home after December 15, 2017, and closed on or before April 1, 2018; then the prior limit would apply.

  • You can no longer deduct interest on home equity indebtedness, which means indebtedness not incurred for the purpose of buying, building, or substantially improving the qualified residence secured by the indebtedness.

  • The deduction limit on charitable contributions of money has increased from 50 percent to 60 percent of your adjusted gross income.

Home mortgage interest deduction reduced. The TCJA limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness, a reduction of $250,000 from prior law. The new limit goes into effect January 1, 2018 and applies only to homes purchased after December 15, 2017. Taxpayers with a binding written contract in place before December 15, 2017 who purchase a home before April 1, 2018, can continue to deduct up to $1 million in acquisition debt. In addition, interest on home equity loans is no longer deductible. This applies to loans made before 2018 as well as to those taken out later.

Moving expenses no longer deductible. For 2018, you can no longer deduct your moving expenses unless you are a member of the Armed Forces on active duty.

Child tax credit and additional child tax credit. For 2018, the maximum credit increased to $2,000 per qualifying child. The maximum additional child tax credit increased to $1,400. In addition, the income threshold at which the credit begins to phase out is increased to $200,000 ($400,000 if married filing jointly).

Credit for other dependents. A new credit of up to $500 is available for each of your dependents who does not qualify for the child tax credit. In addition, the maximum income threshold at which the credit begins to phase out is increased to $200,000 ($400,000 if married filing jointly).

Social security number (SSN) required for child tax credit. Your child must have an SSN issued before the due date of your 2018 return (including extensions) to be claimed as a qualifying child for the child tax credit or additional child tax credit. If your dependent child has an ITIN, but not an SSN issued before the due date of your 2018 return (including extensions), you may be able to claim the new credit for other dependents for that child.

Medical expense deduction reduced. The Adjusted Gross Income (AGI) threshold for deducting medical expenses has been reduced from 10% to 7.5% for 2017 through 2019. This is one of the few provisions of the TCJA that applies retroactively to 2017. The threshold is scheduled to go back to 10% in 2020.

Obamacare individual tax penalty repealed. The Affordable Care Act (more commonly referred to as “Obamacare”) required individuals to obtain minimally adequate health insurance for themselves and their dependents. Those failing to comply had to pay a tax penalty to the IRS. The TCJA permanently eliminates this penalty starting 2019, effectively making individual compliance with Obamacare purely voluntary. However, the penalty remains in effect for 2018.

PHEW!!! It’s a lot to digest, we know…

These are just some of the key changes we felt you should know about for 2018. As you can see, they are quite significant and, in some cases, quite confusing as to how they should be applied.

If you have any questions about the new law or would like to schedule a consultation to discuss your specific tax situation, please CONTACT US right away. We’re here to help!