As we approach the end of the year, we wanted to point out some changes made in the 2018 Tax Cuts & Jobs Act. I know many of you have already been in contact with our office regarding projection calculations – – thank you! Below is a summary of some of the more common changes affecting taxpayers. Please contact us should anything trigger a question.
Happy Holidays,
Bethanie Pollock & Amanda Gondhi
I. NEW TAX RULES FOR 2018
· Income tax rates have decreased by about two to three
percentage points for each tax bracket. While most taxpayers will see a decreased tax rate, a small percentage of people that were in the 33% tax bracket may now find themselves in the 35% tax bracket.
· Personal exemption deductions no longer exist.
· Child tax credit has increased, but it is not entirely
refundable as it was in 2017. Other details of qualifying for this credit have also changed.
· An additional nonrefundable tax credit is available for
dependent children over age 16 and all other dependents but it won’t completely make up for the lost personal exemption.
· Standard deduction amounts have almost doubled from 2017.
While you may have itemized your deductions in prior years, we may advise that you take the standard deduction for 2018.
· If itemizing is more beneficial for your situation, you will
now be subject to a cap of $10,000 for deducting state and local taxes, including all property taxes.
The following are some items to consider in reviewing your 2018 tax
information:
· For a mortgage obtained before December 15, 2017, if the
mortgage is more than $1,000,000, only mortgage interest can be deducted on the portion related to $1,000,000.
· For a mortgage obtained after December 14, 2017, if the
mortgage is more than $750,000, only mortgage interest can be deducted on the portion related to $750,000.
· If you have a home equity loan, whether the interest is
deductible is dependent on the purpose of the debt.
· If you paid someone to take care of your child or dependent so
you can work or look for work, you may be entitled to a tax credit for up to 35% of the expenses paid.
· If you adopted a child, you may be eligible for a tax credit
of up to $13,810 for some or all of those expenses.
· If you experienced a casualty loss (i.e., sudden, unexpected,
or unusual loss) in a presidentially declared disaster area, it may be deductible. Other casualty losses no longer qualify as an itemized deduction.
· For 2018, you can deduct medical, dental, and vision expenses
(e.g., must be primarily to alleviate or prevent a physical or mental defect or illness) to the extent they exceed 7.5% of your adjusted gross income (AGI). For future years, these expenses must exceed 10% of your AGI.
· Charitable contributions:
o The maximum contribution percentage limit changed from 50% of your
contribution base to 60% for cash contributions to public charities.
o Taxpayers 70 ½ years old and older who own an IRA can make a
charitable contribution directly from their IRA to a charity to avoid including the required minimum distribution as taxable income.
· Miscellaneous itemized expenses have been eliminated for tax
years 2018 – 2025 (investment fees, non-reimbursed employee expenses, tax preparation fees).
· Employment-related moving expenses are no longer deductible
for moves occurring in years 2018 – 2025 unless the taxpayer is a member of the U.S. Armed Forces on active duty who moves as a result of a military order to a permanent change of station.
· If you were subject to the alternative minimum tax (AMT) in
prior years, you may get a break this year as a result in changes to the exemption amounts as well as the income level at which its taxed.
· If you have a 529 Plan, you can use up to $10,000 in aggregate
distributions per year for elementary and secondary school tuition.
Previously, they could only be used for higher education expenses.
· The penalty for taxpayers who fail to carry health insurance
still applies for 2018 but does not apply to 2019 and beyond.
· Taxpayers with income from sole proprietorships, S
corporations, partnerships, or LLCs taxed as partnerships may qualify for a 20% Qualified Business Income Deduction. If the income relates to a specified service business and the taxpayer’s taxable income is over
$315,000 (married filing jointly) then the deduction may be phased out or completely disallowed.
II. YEAR-END TAX PLANNING
· Retirement Plan Considerations:
o For 2018, the maximum 401(k) contribution you can make is $18,500.
For taxpayers 50 or older, that amount increases to $24,500.
o For 2018, the maximum SIMPLE 401(k) contribution you can make is
$12,500. For tax payers 50 or older, that amount increases to $15,500.
o If you are considering converting a traditional IRA to a Roth IRA,
this would be a good year to do it since the tax rates decreased.
· If your stock portfolio includes stocks that have lost value
since you originally invested and you’ve decided you want to divest yourself of them, we can evaluate whether you might benefit from selling off appreciated stocks, particularly those that would generate a short-term capital gain, and using the resulting gain to limit your exposure to a long-term capital loss, the deduction of which is limited.
In addition, any net capital gain you may reap, may be taxed at the substantially reduced capital gain tax rate.
· Alternative Minimum Tax (AMT):
o Beginning in 2018, fewer taxpayers will be subject to the AMT as a
result of sharp increases in exemption amounts and higher exemption phase-out levels.
o The amount of the exemption depends on your filing status.
o Certain adjustments to your taxable income for regular tax purposes
are not allowed for AMT purposes (e.g. standard deduction, state and local income taxes, property taxes, interest on a second mortgage, and various tax credits). Thus, if you have a substantial increase in any of these items for 2018, but have not previously been subject to the AMT, there is the possibility that you could be subject to the AMT for 2018.
If you work from home, this factor may allow us to shift how the expenses impact AMT.
· In order to increase your itemized deductions, you can donate
appreciated stock thereby avoiding tax on capital gains while increasing your charitable contribution deduction.
· There are new ways in which the Kiddie Tax is calculated.
· Depending on your projected income for 2018 and 2019, it may
make sense to either accelerate income in 2018 or defer income in 2019 as well as accelerate deductions in 2018 or defer deductions in 2019.
Don’t hesitate to reach out to us with any questions or concerns. We are happy to provide our thoughts and suggestions in how to best utilize your income and deductions to result in the best tax rate for you this tax season.
Changes Made in the 2018 Tax Cuts and Jobs Act
