Numbers Taxpayers Need to Know in 2018 by Tony Gutierrez, CPA
With the 2017 April tax-filing deadline in the rearview mirror, now is a good time to revisit the provisions of the Tax Cuts and Jobs Act (TCJA), which the IRS codified for tax years beginning in 2018. The following information will apply to the tax returns that individuals file in 2019.
Lower Individual Tax Brackets through 2025
While the TCJA lowers the tax rates that apply to most income levels, it does not make income taxes any simpler. A seven-bracket system remains in effect with a low rate of 10 percent for taxable income up to $9,525 for individuals, or $19,050 for married couples filing jointly, to a high of 37 percent for taxable income above $500,000 for individuals, or $600,000 for married couples filing jointly. Figuring out an individual’s actual taxable income depends upon his or unique situation, including filing status, sources of income and claims for credits, deductions and exemptions that can potentially reduce tax liabilities.
Higher Gift and Estate Tax Exemption
The estate and gift-tax exemptions double in 2018, allowing individuals to exclude from their taxable estate up to $11.18 million in assets, or $22.36 million for married couples filing joint tax returns. Estates valued above these thresholds will be subject to a 40 percent tax. The estate tax exemption will be indexed for inflation until 2026, when it will revert to its 2017 pre-TCJA level.
Higher Standard Deduction
The TCJA eliminates personal exemptions in 2018 while increasing the standard deduction to $12,000 for individual taxpayers, or $24,000 for married taxpayers filing jointly. In future years, these amounts will be adjusted annually for inflation until 2026 when the deduction it is set to expire.
Limits to Itemized Deductions
Taxpayers continue to have the option to either claim a standard deduction or itemize each deduction for which they may be entitled. With the new, higher standard deduction in 2018, it is expected that fewer taxpayers will itemize. However, for high-net-worth individuals whose itemized deductions may exceed the higher standard deduction, itemizing may continue to be the best option, especially when considering that the TCJA suspends the overall 3 percent of adjusted gross income (AGI) limitation on itemized deductions.
With this in mind, taxpayers should consider the following changes to common deductions.
- Casualty and Theft Losses are no longer deductible unless they result from a president-declared federal disaster, such as the 2017 hurricanes or California wildfires.
- Charitable Deductions are available only to taxpayers who itemize their deductions. However, the amount of cash contributions that an eligible taxpayer can deduct increases to 60 percent of his or her AGI. Benevolent taxpayers can maximize their tax-deductible gifts by bunching together several years of small donations into one year when the contributed amount will exceed the standard deduction. Similarly, taxpayers may realize tax benefits and stretch their philanthropic dollars by focusing their giving toward donor-advised funds and/or private foundations.
- The Foreign Earned Income Exclusion for 2018 increases to $103,900.
- Medical and Dental Expenses are deductible to the extent they exceed 7.5 percent of an itemizing taxpayer’s AGI.
- Miscellaneous Itemized Deductions are disallowed beginning in 2018. This includes deductions for use of a home office, unreimbursed job expenses, expenses incurred while searching for a job, as well as tax preparation and other professional service fees.
- Mortgage Interest is deductible on new loans executed on or after Jan. 1, 2018, on acquisition indebtedness of $750,000 or less for individual taxpayers. This dollar limit does not apply to mortgages existing on or before December 15, 2017. For 2018, taxpayers who refinance loans existing on or before December 15, 2017, will be able to deduct interest on up to $1 million of indebtedness. In 2018, there is no longer a deduction for interest paid on a home equity line of credit (HELOC).
- Moving expenses are no longer deductible regardless of whether or not they resulted from a taxpayer’s job change.
- Property Tax, and State and Local Tax (SALT) deductions are limited to a combined total of $10,000 for single and married filing jointly taxpayers. A number of U.S. states, including New York, New Jersey and California, have or are planning to introduce laws to reduce the impact of the SALT deduction limit on its residents. How the IRS will treat these state-level provisions is unclear at this time.
- Retirement Savers continue to receive favorable tax treatment when making annual contributions to retirement accounts. In 2018, the maximum amount that taxpayers may contribute to a 401(k) and receive a tax deduction is $18,500, or $24,500 for taxpayers age 50 and older. The limit on contributions to traditional and Roth IRAs remains at $5,500, or $6,500 for individuals age 50 and older. In addition, because the TCJA increases the income thresholds for taxpayers to contribute to IRAs and Roth IRAs, more taxpayers will be able to take advantage of these qualified retirement plans to save for the future.
- Student Loan Interest continues to be deductible up to $2,500, regardless of whether taxpayers choose to itemize or not. However, the deduction begins to phase out when taxpayers’ modified adjusted gross income (MAGI) exceeds $65,000, or $135,000 for married filing jointly. The deduction is not available to taxpayers whose MAGI reaches $80,000, or $165,000 for married couples filing joint returns.
A Mixed Bag for Families with Children
529 Savings Plans continue to be tax-efficient vehicles for families to save for a child’s future college education. New for 2018 is the ability for families to take from 529 plans tax-free distributions of up to $10,000 per year to pay for a child’s K through 12 private or religious school tuition. Annual 529 savings plan contributions of $15,000 per beneficiary, or $30,000 per beneficiary for married couples filing jointly, are generally not subject to federal gift taxes. There are also planning opportunities that allow taxpayers to elect to treat contributions in excess of the annual gift tax exclusion as if they were spread over a five-year period.
An Adoption Credit is available for families to recover up to $13,810 in adoption-related expenses. Families that adopt children with special needs are treated as having paid the maximum $13,810 credit regardless of the actual expenses they incur. This nonrefundable credit is subject to a phaseout when MAGI exceeds $207,140 and completely phases out when MAGI exceeds $247,140.
The Child Tax Credit increases to $2,000 per qualifying child and is refundable up to $1,400, depending on a family’s AGI. Once a taxpayer’s AGI reaches $200,000, or $400,000 for married taxpayers filing jointly, the Child Tax Credit begins to phase out.
Obamacare Shared Responsibility Penalty
Taxpayers who go without health insurance in 2018 will continue to be subject to the Affordable Care Act’s individual mandate. The penalty for failing to have health coverage for any month during the year is the greater of 2.5 percent of AGI, or $695 per adult and $347.50 per child up to a maximum of $2,085. The individual mandate is scheduled to be eliminated beginning in 2019.
Tax reform is a game-changer for most U.S. taxpayers. However, leveraging the benefits of the new law and mitigating the risk of exposure to an increased tax burden in 2018 and in future years requires careful planning under the guidance of experienced tax advisors and accountants.
About the Author: Tony Gutierrez, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at firstname.lastname@example.org.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.