A Recap of Impending Tax Law Changes
I know, it’s not April 15th yet, and I’m not necessarily in any hurry to get there. But with some substantial changes to the tax law made effective in 2018, I figured it’s not too early to remind everyone what is in store for them from an individual tax perspective heading into filing season 2019:
- Forms 1040A and 1040EZ have been eliminated, so everyone will be using the standard Form 1040. The Form 1040 has been redesigned and is supplemented by new Schedules 1 through 6:
- Schedule 1 reports various types of income, including business income or loss, capital gain or loss, unemployment compensation, alimony received, taxable refunds of state and local taxes, gambling winnings and more. It also includes above-the-line deductions for traditional IRA contributions, self-employed retirement plan contributions, student loan interest paid, alimony paid and more.
- Schedule 2 reports taxes, including AMT liability from Form 6251, tax on a child’s unearned income (Kiddie Tax) and more.
- Schedule 3 reports nonrefundable credits such as education credits (from Form 8863), adoption credits (from Form 8839), foreign tax credits (from Form 1116) and more.
- Schedule 4 reports the liability for “other taxes” such as self-employment tax (from Schedule SE), household employment taxes (from Schedule H), early distribution penalties from qualified plans and more.
- Schedule 5 reports other payments and credits, such as estimated tax payments and payments made with a filing extension.
- Schedule 6 reports a foreign address if you have one.
- The individual income tax rate brackets for ordinary income are 10%, 12%, 22%, 24%, 32%, 35% and 37%, with the top bracket applying as taxable income exceeds $500,000 for single taxpayers and $600,000 for married taxpayers.
- The basic standard deduction is $24,000 for married taxpayers and $12,000 for single taxpayers. There is an additional standard deduction of $1,300 for those over age 65 or blind. This increases to $1,600 when the taxpayer is unmarried.
- You can no longer claim a personal exemption deduction for you or any family members. However, the child tax credit increased to $2,000 in 2018, subject to phaseouts.
- The tax rate on the employee portion of Social Security is 6.2% of wages up to $128,400, while Medicare is 1.45% of all wages with no limitation.
- The 2018 contribution limit for traditional Individual Retirement Accounts (IRAs) and Roth IRAs is unchanged at $5,500, or $6,500 for those over age 50. This increases to $6,000 and $7,000 respectively in 2019.
- If you are a sole proprietor or have an interest in a partnership, LLC or S-corporation, you may be eligible for a deduction of up to 20% of “qualified business income.” This deduction is a personal deduction, not a business deduction.
- The Alternative Minimum Tax (AMT) exemptions, phaseout thresholds, and the dividing line between the 26% and the 28% AMT brackets are adjusted for inflation. The 2018 AMT exemptions (prior to any phaseout) are $109,400 for married taxpayers and $70,300 for single taxpayers.
- The deduction for state and local taxes is limited to $10,000. This decreases to $5,000 if married filing separately. This deduction includes income taxes or general sales taxes, real estate taxes, and personal property taxes. The IRS has proposed regulations to thwart states from attempting to use workarounds to this limitation.
- The deduction for mortgage interest on a principal residence and second residence is limited to acquisition debt up to $750,000 for loans acquired after December 15, 2017. The deduction for mortgage interest on loans acquired prior to that date continues to be at the $1 million level. However, no deduction is allowed for interest on home equity debt regardless of when the loan was obtained, to the extent the loan proceeds weren’t used to buy, build or improve your home.
- Cash charitable contributions are limited to 60% of adjusted gross income (AGI) as compared to 50% in prior years.
- No deductions are allowed for casualty or theft losses unless occurring in a Federally declared disaster area. The usual $100 and 10% of AGI limits continue to apply.
- Numerous tax breaks expired in 2017 and had not been extended for 2018 (as of now), including:
- Above-the-line deduction for tuition and fees
- Itemized deduction for mortgage insurance premiums
- Tax credit for home insulation, storm windows, and other energy improvements
- The annual gift tax exclusion has increased to $15,000 per donee for 2018 gifts.
- Distributions from 529 plans to pay tuition in primary and secondary school up to $10,000 is not considered a taxable distribution.
- Children with unearned income above $2,100 will pay tax based upon tax rates applicable to trusts and estates and no longer on the top tax rate of their parents.
- The following deductions and/or phaseouts are no longer applicable to 2018 tax returns:
- Moving expense deduction
- Miscellaneous itemized deductions subject to the 2% of AGI floor
- Phaseout of itemized deductions (Pease Limitation)
Although there has been a great deal of press stating that your taxes will be less in 2018, and that may well be the case, your personal situation may be different. While the tax brackets are at reduced rates, there are fewer allowable deductions. Those that reside in a highly taxed state may be used to writing off significantly more than will be allowed under 2018 rules. Will the decrease in tax rate offset the limitation of the deductions? There are many factors at play so It will be interesting to see how this pans out over the next few months.
Good luck this filing season, and do not hesitate to reach out to any of us here at Bronfman Rothschild with any questions or concerns.