2018 tax law changes

Tax Cuts and Jobs Act of 2017

 As a reminder, these changes will affect the 2018 tax year, and are NOT retro-active to 2017.

There are still 7 tax brackets, but they are reduced:                                                                             2017:  10% – 15 – 25 – 28 – 33 – 35 – 40                                                                                                    2018:  10% – 12 – 22 – 24 – 32 – 35 – 37

One of the biggest changes is that the standard deduction will be DOUBLED, but the personal exemptions will be GONE!

For example, in 2017 a family of 5 would claim $12,700 for their standard deduction, plus $20,250 for personal exemptions ($4,050 per person) for a total of $32,950. In basic form, this is what will be subtracted from your income before calculating your tax.  For this same family, in 2018 there would be only the doubled standard deduction of $24,000!  This may sound terrible at first, but there are a few other factors that have changed:

First, the child tax credit has been increased from $1,000 to $2,000 per child. This same family of five would now have $6,000 taken off of their tax (assuming all of the children are age 16 or younger).  Remember, this is taken off of your calculated TAX, not off of your income before the tax is calculated.  To compare the difference, if you are in the 15% tax bracket, this $6,000 tax cut equates to $40,000 of income not being taxed.

I believe that this will more than make up the loss of exemptions when you claim your dependent children under age 16.  However, those who are claiming other family members and children that are age 17+ “might” see a negative impact on your taxes, depending on your situation.  For example, if you are single and caring for an adult dependent, you will be getting double the standard deduction up from $6k to $12,000 but will lose $8,000 of exemptions (net loss of $2,000 in taxable income reduction).

Some changes we will see for 2018 taxes:

1) There is a lot of discussion about the changes to the “kiddie tax” which applied to unearned income for children under 19, and students under 24.  Unearned income is usually defined as investment interest or dividend, since it usually applied to children under age 14.  This income over a certain threshold caused it to be taxed at their parent’s tax rate, instead of their own lower rate  (This was to prevent parents from placing large amounts of their assets under their child’s name).

For 2018, the age limit is increased to students up to age 24, which will have an effect on taxable portions of scholarships and grants.  (To define: the taxable portion of a scholarship is that which is used for non-school purposes.  Non-taxable = tuition, books, fees / taxable = room and board.)  In the past, these amounts were always taxable, but at the student’s tax bracket.  Now, these benefits will be taxed at their parent’s tax bracket.

2) Student loan interest deductions are still capped at $2,500 but the phase-out of the deduction now begins when your Adjusted Gross Income (AGI) exceeds $65,000.
NOTE: the American Opportunity Credit and Lifetime Learning Credit have not been changed.  It may still be an advantage for parents to claim their college children as dependents.

If you are still able to itemize, these changes will apply:

3) State and local income taxes (or sales tax), and property taxes can still be included as an itemized deduction.  The aggregate deduction is now capped at $10,000 (deduction for foreign property tax paid is repealed).  you can pre-pay January’s property tax payment for 2018, but no other pre-payments will apply to 2017

4) Charitable contributions can still be itemized.  The limitation has been increased to 60% of your total income.

5) Mortgage interest can still be itemized as a deduction.  The total debt allowed for interest is $750,000 and applied to a first and second home. The deduction for Home-Equity loan interest has been repealed.

6) Gambling losses can still be itemized as a deduction, up to the amount you won (Note that there are many fine points in this deduction that we can discuss in person… not enough space to discuss here).

Other changes

7) Deductions for casualty loss / damage to personal property is repealed, with exceptions to federal disaster declarations.

8) Out-of-pocket teacher deductions are limited to $250.  You can no longer itemize additional amounts

9) Moving expenses are repealed, with the exception of armed service members on active duty.

10) Alimony payments are no longer deductible by the payer, and not reported as income by the recipient.

11) The ACA penalty for no having health insurance is repealed, but NOT until 2019. The penalty still applies for the 2018 tax year.