The Tax Cuts and Jobs Act created significant changes to tax laws affecting individual taxes (Form 1040). The following is a checklist of topics that taxpayers should be aware of as they prepare to file their 2018 tax returns.
- Standard vs. Itemized Deductions
The standard deduction has increased from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married filing jointly filers. Per The Heritage Foundation, it is estimated that 90% of taxpayers will take the new standard deduction amount, up from less than 69% for tax year 2016 (Journal of Accountancy January 2019, “Tackling TCJA changes this tax season”).
- Personal Exemptions
In 2017, a taxpayer was able to deduct up to $4,050 for himself, his spouse and for each dependent. These exemptions are no longer available for the 2018 tax year.
- Medical Expense Deduction
The medical expense deduction floor is reduced to 7.5% of adjusted gross income for regular tax and alternative minimum tax purposes for the 2018 tax year. The medical expense deduction floor reverts back to 10% for the 2019 tax year.
- The State and Local Tax (SALT) Cap
The maximum deduction for state and local tax is $10,000. This includes state income tax, sales tax, and property tax. Some states have enacted legislation intending to circumvent the new SALT cap by giving income tax credits in exchange for charitable contributions to state funds. In response to these state strategies, the IRS proposed regulations that reduce the charitable deduction by the amount of any state or local tax credits granted to the Taxpayer as a result of the state fund contributions. The proposed regulations also impact pre-existing state charitable contribution programs.
- Casualty Loss
A taxpayer may only claim a casualty loss deduction for losses sustained in federally declared disasters. When claiming the deduction, the taxpayer must include the FEMA number and location of the property.
- Charitable Contributions
The maximum charitable contribution deduction has increased from 50% to 60% of adjusted gross income for the 2018 tax year. Taxpayers may not deduct contributions towards athletic event seating rights. Taxpayers will need proof for any contribution of $250 or more.
- Mortgage Interest Deduction
The maximum amount of mortgage debt for which interest can be deducted has been reduced from $1,000,000 to $750,000. A mortgage refinancing incurred after December 15, 2017 that includes a cash out, including closing costs, may result in the loss of the grandfathered $1,000,000 debt limit and will instead be subject to a $750,000 debt limit. Interest paid on home equity loans is no longer deductible unless the loan proceeds were used to acquire or improve the taxpayer’s residence. Taxpayers need to save receipts and documents as proof of expenses related to buying, building and/or improving the home if they are taking a home equity interest deduction.
- Miscellaneous Itemized Deductions
Miscellaneous itemized deductions previously subject to the 2% of AGI floor are no longer deductible through 2025. This includes unreimbursed employee business expenses, investment expenses, tax preparation fees, and hobby expenses.
- Moving Expenses
Deductions and exclusions for moving expenses are only allowed to active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station.
- The Child Tax Credit
The Child Tax Credit has increased from $1,000 to $2,000, subject to phase-outs based on income. To claim this credit, taxpayers need a Social Security number for each qualifying child.
- Qualifying Relative Credit
Taxpayers can claim a $500 nonrefundable credit for qualifying relative dependents. Children eligible for the Child Tax Credit are not also eligible for this credit.
- The Kiddie Tax
The Kiddie tax is no longer based on the parents’ income tax rate. Instead, the estate and trust income tax rates are applied to the child’s unearned income in excess of $2,100.
- The Alternative Minimum Tax (AMT)
The new AMT exemptions have increased compared to 2017. This coupled with the new SALT cap and increase to the phase-out threshold amounts for these exemptions, means that fewer middle-income taxpayers will be subject to AMT.
-Married filing jointly = $109,400, increased from $84,000 in 2017
-Single and Head of Households = $70,300, increased from $54,300 in 2017
-Married filing separately = $54,700, increased from $42,250 in 2017
- The Affordable Care Act
The individual mandate for the Affordable Care Act still applies for the 2018 tax year, but expires for 2019.
- Consolidation of Education Savings Rules
Distributions made from qualified tuition programs can be used for elementary and secondary school expenses of up to $10,000 per year
If you have questions about how these changes affect your tax return, contact an MCB Advisor at 703-218-3600 or click here. To review our tax news articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.