2018 TAX CHANGES

14496823362802018 IRS Standard Deductions and Exemptions

Virtually all taxpayers are impacted by the changes in the tax reform legislation. Knowing about these changes now will help taxpayers plan and understand how the Tax Cuts and Jobs Act (TCJA) could impact their take-home pay and their 2018 tax refund. Here is a summary of what you should know.

Tax brackets and tax rates change for most taxpayers

Most tax filers will pay tax using a new tax bracket and tax rate structure. However, the tax rates remain progressive, meaning tax rates rise as income increases. While there are still seven tax rates most have been lowered from 2017.

 

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Exclusion of Gain on Sale of a Principal Residence

The final bill retains the current-law maximum rates on net capital gains (generally, 15% maximum rate but 20% for those in the highest tax bracket; 25% rate on “recapture” of depreciation from real property).

 

Standard Deductions & Exemptions

Standard deductions increase dramatically in 2018 while personal exemptions are suspended (eliminated) through the year 2025. With this significant increase in the standard deduction and the decreased number of itemized deductions that are allowed, more taxpayers will likely take the higher standard deduction and less will be itemizing on their tax returns.    tax standard ded 18 copy

Fully eliminated

  • Miscellaneous itemized deductions subject to the 2-percent floor
    • Employee business expenses
    • Tax preparation fees
    • Investment interest expenses
  • Personal casualty and theft losses (except for certain losses in certain federally declared disaster areas)

 

Limited

  • State and local income taxes (SALT) or state and local sales tax, plus real property taxes, may be deducted, but only up to a combined total limit of $10,000 ($5,000 if MFS)
  • Home mortgage interest has several modifications:

            New dollar limit on total qualified residence loan balance

The IRS noted that the new tax law imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. Starting this year, taxpayers can only deduct interest on $750,000 of qualified residence loans, or $375,000 for a married taxpayer filing a separate return. That’s down from the previous limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the total amount of loans used to purchase, build or substantially improve a taxpayer’s main home and a second home.

The IRS provided a few examples to show how the new law works:

Example 1: In January 2018, a taxpayer gets a $500,000 mortgage to buy a main home with a fair market value of $800,000. The following month, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total doesn’t exceed the home’s cost. Because the total amount of both loans doesn’t exceed $750,000, all the interest paid on the loans is deductible. But if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan wouldn’t be deductible.

Example 2: In January 2018, a taxpayer gets a $500,000 mortgage to buy a main home. The loan is secured by the main home. The following month, the taxpayer takes out a $250,000 loan to buy a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages doesn’t exceed $750,000, all the interest paid on both mortgages is deductible. But if the taxpayer got a $250,000 home equity loan on the main home to buy the vacation home, then the interest on the home equity loan wouldn’t be deductible.

Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to buy a main home. The loan is secured by the main home. In February 2018, the taxpayer gets a $500,000 loan to buy a vacation home. That loan is secured by the vacation home. Because the total amount of both mortgages is more than $750,000, not all the interest paid on the mortgages is deductible, but a percentage of the total interest paid would be deductible.

Modified

  • Charitable contributions: The deduction for charitable contributions is expanded so that taxpayers may contribute up to 60% of their adjusted gross income, rather than up to 50%.
  • Gambling losses remain deductible, but only to the extent of gambling winnings. The definition of losses from wagering transactions is modified.
  • Medical expenses remain deductible. For 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of AGI. In 2019, the threshold will increase to 10% of AGI.

Many “Above-the-line” deductions eliminated, limited or modified

Fully eliminated

  • Alimony deduction for payments made under orders executed after December 31, 2018. For new orders, the TCJA no longer allows payors to deduct alimony payments or requires the recipient to report income for alimony received. (Payments under existing orders are grandfathered and may continue to be deducted by the payor and should be reported as income by the recipient.)
  • Tuition and fees deduction expired under previous law and was not renewed by the TCJA.
  • Domestic production activities deduction (DPAD)

Mostly eliminated

  • Moving expenses are disallowed.  An exception exists for qualified military moves.

Stays the same

  • Educator expense deduction (K-12 educators can deduct up to $250 per year for unreimbursed classroom supplies.)
  • Student loan interest of up to $2,500 can be deducted by qualifying taxpayers for interest paid on student loans.
  • Health savings account (HSA) deduction
  • IRA deduction
  • Deductions for self-employed taxpayers (SE tax, SE health insurance, SE qualified retirement plan contributions)

Some education benefits remain the same, others modified

Taxpayers can continue to claim the American Opportunity Credit, a credit of up to $2,500 per year for the first four years of college education, and the lifetime learning credit, a credit of up to $2,000 per year for qualifying education expenses.

 

How does this affect me?

You’re more likely to take the standard deduction. The higher standard deduction alone will be enough to push many taxpayers into taking it rather than itemizing. But taxpayers who used to itemize due to hefty mortgage interest, lots of charitable contributions, or high state and local income and property taxes may find those more-limited deductions aren’t enough to push them over the threshold now.

Taxes may be simpler in some ways but more complex in others. Taking the standard deduction is, indeed, simpler than itemizing. For those who are used to itemizing, these are all big changes.  Now is a good time for everyone to take a look at what is different and how the new tax law changes affect what they are doing for next filing season.

Remember, this tax law takes effect in 2018 to be filed in 2019. So when you’re filing your 2017 taxes in early 2018, the 2017 deductions and personal exemption still apply.

 

Steven Z. Freeman, CPA, and the FREEMAN & ASSOCIATES team, provides Tax Preparation services and can assist you with any actual calculations on your Tax Returns.     If you have any questions on this matter or to schedule a complimentary initial consultation, please contact us at (805) 495-4211   Steve@FreemanAssoc.net   www.AccountantThousandoaks.com

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