Tax Reform 101: Important Changes for 2018

As noted in our two previous blogs outlining the new income tax reform bill, the law isn’t so much simplification as it is complification. Here’s an overview of changes affecting your individual income tax returns:

• The tax rates dropped and the brackets widened, but the law still keeps seven of them (eight if you count the zero tax bracket). The 0%/15%/20% brackets for long-term capital gains and qualified dividends also stretched, especially the 15% bracket; the 3.8% Medicare surtax threshold didn’t change.
• Primary residence sales exclusions are generally still exempt.
• We didn’t receive much relief for trust and estate income tax rates, which barely budged.
• The personal exemption was replaced with an enhanced child and dependent credit plan. The child credit increases from $1,000 to $2,000, but only until the young ones turn 18; $1,400 of that amount may be refundable if you have no tax to offset.

A new $500 non-refundable credit is added for other qualifying dependents, like older kids and parents. Credits for the elderly and permanently disabled survived.

• The standard deduction jumps from $6,350/$9,350/$12,730 (Single-MFS/HH/Joint) in 2017 to $12,000/$18,000/$24,000 in 2018, so more than half of all itemizers will no longer do so. The add-ons for blind and disabled will be $1,300 for married filers and $1,600 for all others.

Our recommended strategy to “bunch” deductions is even more practical, so that you might beat the standard deduction every other year.

• The highly publicized maximum deduction for state and local taxes was compromised at $10,000, having a significant effect on the top 10% of some high tax state residents. In spite of all the noise, generally tax prepayments in 2017 won’t qualify for an early deduction.
• Charitable contributions are still fully deductible, with the annual limits rising to 60% of AGI for cash and 30% for non-cash. Remember, you can bypass your annual IRA RMD income by passing it to a charity once you reach 70 ½. That’s especially valuable if you’re no longer able to itemize.
• Casualty and theft losses are still harder to deduct – now they must be the result of a federally declared disaster. So, a typical house fire or major vandalism will no longer qualify. The 10% of AGI floor remains.
• Another big hit for some is the elimination of most miscellaneous itemized deductions, those already subject to the 2% limit based on AGI, including expenses for business, home office, production or preservation of income, safe deposit boxes, union dues, tax preparation and advice, job searches, education and uniforms. However, Gambling losses are still allowable itemized deductions, and can now include related costs, such as travel.
• Good news for those affected by the Pease phase out of their deductions since 2013 – it’s gone again.
• There’s no change to the student loan interest deduction, educator’s expense deductions, education credits or deductions, or the adoption credit. However, moving expense deductions are gone and any reimbursements are taxable, except for those related to the Armed Services.
• Alimony gets attention for decrees filed after 2018. The payment will no longer be deductible and the receipt no longer taxable.
• Re-conversions of retirement plan Roth rollovers are not allowed after 2017. 
• The “kiddie” tax is slightly simplified, in that it cuts the tie to the parent’s income and rates. Any material investment income will now be taxed at the trust rates mentioned above.
• Section 529 plans now can pay for curriculum, books and materials, including online, tutoring outside the home, and educational therapy for the disabled. You can also pay up to $10,000 per student of these expenses for K-12. (Think this through, though, as your needs when your children attend college may be greater than they are now.)
• The ACA individual mandate still lives, but the penalty drops to $0 in 2019. Since last year, the IRS was already instructed not to enforce it.
• The annual gift exclusion rises to $15,000 in 2018 and the Estate tax exemption to $11.2 million per person. You may still want to file a return to elect “portability” between spouses. Step-up basis survived.
• For those of us in the tax preparation business, we also received new rules. We must inquire about your qualification for the Earned Income, Child Tax and Higher Education costs.

For additional information and details on this historic tax legislation, refer to our Helpful Resources P&R Publications link.Of course, if you need a proven tax accounting firm to assist you with individual or business tax preparation or financial planning, our team remains committed to you. We’re available to explain the law’s nuances to help you maximize this tax overhaul to your benefit. Contact us at Office@CPAsite.com or 904.396.5400.