Although the majority of existing tax law remained intact, there were some significant changes made when the tax reform package was passed late in 2017. Most notable are the changes to individual tax returns. Below, we have compiled a summarized list of changes that you can expect to see when you file your individual tax return this year. **Spoiler Alert... the postcard-sized tax return was not included in the final changes.**
Tax Rate Modifications: The Act maintains seven tax brackets as in prior law while reducing the highest tax bracket from 39.6% to 37% for Single filers with taxable income over $500,000, but only $600,000 for Married filing joint filers, which essentially re-establishes the so-called "marriage penalty". The table below displays the changes for each tax bracket for Single and Married couples filing joint.
Alternative Minimum Tax (AMT): Although it was proposed to be repealed, AMT for individuals was retained in the final version of the Act. They did, however, increase the exemption amounts to $70,300 for single taxpayers and $109,400 for married taxpayers filing joint. Additionally, the phaseout threshold was increased to $500,000 and $1,000,000 for single and joint filers, respectively.
Itemized and standard deductions: Consistent with what was proposed, the Act increases the standard deduction to $12,000 for single taxpayers, and $24,000 for married taxpayers filing jointly. There is also still an additional standard deduction for the blind and elderly. This will allow many taxpayers to avoid itemizing deductions; however, for those that will still itemize, there have been several changes...
Mortgage interest will be limited to interest on $750,000 ($375,000 for married filing separate taxpayers) used to purchase a primary or secondary residence. Mortgages existing prior to December 15, 2017 will be grandfathered under the prior law, allowing interest to be deducted on loans up to $1 million. The deduction for interest on home equity loans is no longer allowed.
All miscellaneous itemized deductions have been eliminated. Further guidance is needed from the IRS on certain deductions, but in general, miscellaneous deductions include: unreimbursed employee expenses (i.e. job travel, union dues, job education, home office, job search etc.), tax preparation fees, investment expenses, safe deposit box fees, hobby expenses, and gambling losses
Personal Exemptions: The $4,050 per person exemption in 2017 has been eliminated, which could put larger families at risk of paying higher taxes when compared to smaller families, married couples without children, or single individuals.
Moving Expenses: This deduction is no longer available. Additionally, if an employer reimburses an employee for their moving expenses, that reimbursement will be added to the W-2 and taxed as wages (except for active duty armed forces who are moving pursuant to military orders).
Alimony: Effective for any divorce or separation after December 31, 2018, alimony paid will no longer be deductible, and alimony received will no longer be taxed as income.
Child Tax Credit: The credit has been increased to $2,000 from $1,000 per qualifying child. $1,400 of the credit will be refundable if the taxpayer doesn't owe any other tax. The credit phases out when married filing joint taxpayers have an AGI over $400,000. Additionally, the Act provides for an additional $500 nonrefundable credit for qualifying dependents other than children.
Section 529 plan funds: Funds can be used for elementary or secondary public, private, or religious school tuition and eligible education expenses; however, the distributions are limited to $10,000 per year per student. Home-schooling does not qualify.
Penalty for lack of health coverage: As of December 31, 2018, the penalty is reduced to zero for individuals who do not maintain qualifying health insurance coverage under the Patient Protection and Affordable Care Act (PPACA, aka Obamacare).
Filing requirements: If an individual's gross income does not exceed the standard deduction for the year, there is no requirement to file. It should be noted though that most working individuals with income below the standard deduction amount are likely due a refund of income taxes withheld from their wages during the year and should still file to get this refund and any other applicable credits.
Estate, gift, and generation-skipping transfer taxes: The exclusion amount and GST exemption amount were both doubled to $11.2 million from $5.6 million for transfers occurring after December 31, 2017 with indexes for inflation each year through the end of 2025. On January 1, 2026, the amounts will revert back to 2017 law.
Note: The 20% deduction for pass-through income for self-employed individuals, partners, and S corporation shareholders will also affect individual tax returns. Further guidance is pending from the IRS on how this deduction will apply.
If you have questions about your tax return, or would like to get an estimate of your 2018 taxes based on the tax reform changes, contact us for an analysis.