Trying to file your tax return but aren’t sure what to do because of the recent tax reform? If you’re like most taxpayers, chances are you haven’t read The Tax Cuts and Jobs Act, which is understandable as the tax reform legislation is over 500 pages long and can be confusing and hard to understand for the average taxpayer. The good news is we’ve read through the new tax law and we can help you understand some of the major changes that will affect you and your business! All these changes will affect you when you file your 2018 federal tax return. Here are the tax deductions and tax credits that were changed by the Tax Cuts and Jobs Act!
Standard deduction and personal exemption
One of the biggest changes with The Tax Cuts and Jobs Act affects your standard deduction. The standard deduction for single filers will jump to $12,000. For those filing Married Filing Jointly, your deduction will jump to $24,000. For 2018, the additional standard deduction amount for the aged or the blind is $1,300. The additional standard deduction amount increases to $1,600 for unmarried taxpayers. For 2018, the standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,050 or the sum of $350 and the individual’s earned income.
There will be no personal exemption amounts for 2018.
The Child Tax Credit
The Child Tax Credit is designed to give an income boost to the parents or guardians of dependent children. For 2017, the child tax credit was up to $1,000 per child. For 2018, the Child Tax Credit has been expanded up to $2,000 per qualifying child and is refundable up to $1,400 subject to phaseouts. There is also a temporary $500 nonrefundable credit for other qualifying dependents. Phaseouts will begin with an Adjusted Gross Income of more than $400,000 for Married Filing Jointly and more than $200,00 for all other taxpayers.
State and Local Taxes Deduction
One of the most contested changes on the tax reform bill is the changes to your state and local tax deduction (SALT). While your deductions for state and local income, sales and property tax remain available, the new law placed on cap on the deduction. The maximum amount you can claim for SALT deductions is $10,000. Some states are currently suing the U.S. government over the SALT deduction cap.
A change that could disproportionately affect those living in certain states is the restriction on the amount of mortgage interest that can be deducted. Before, taxpayers could deduct interest on a mortgage of up to $1 million. Now, in 2018, taxpayers can only deduct interest on the mortgage value up to $750,000. The IRS recently announced that even with the new restrictions, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC) or a second mortgage, regardless of how the loan is labeled. Specifically, the new law eliminated the deduction for interest paid on home equity loans and lines of credit through 2026, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
Good news for those who like to give to charities, your deduction increased for 2018! The percentage limit for charitable cash donations by an individual taxpayer to public charities and other certain organizations has increased from 50% to 60%!
Medical Expenses & Medical Savings Account
Your medical and dental expenses deduction did take a small hit with the new tax law. Taxpayers can only deduct medical and dental expenses that are 7.5% of your AGI. This is down from 10%.
For 2018, a high-deductible health plan (HDHP) has an annual deductible that cannot be less than $2,300 but cannot exceed $3,450. This is for those who have a self-only coverage. The maximum out-of-pocket expense amount for self-only participants is $4,550. For those with family coverage on an HDHP, you get an annual deductible amount that is not less than $4,550 but cannot exceed $6,850. The maximum out of pocket expenses for family coverage is $8,400.
In some divorce situations, one spouse or ex-spouse will be legally obligated to make payments to the other spouse. These payments could always be deducted by the payer for federal income tax purposes if they met the tax law definition. The recipient of the alimony would then have to report those payments as taxable income. This process is changing due to the Tax Cuts and Jobs Act. The process will remain the same for those who made alimony payments under a pre-2019 divorce agreement. But for those who make payments under a post-2018 agreement, your process will be very different.
For alimony payments required under a divorce that was executed after December 31st, 2018, the new tax law eliminates the old deduction for alimony payments. This also means recipients of the alimony payments will no longer have to include them in their taxable income. This change will prove to be very expensive for those who are required to make alimony payments.
Miscellaneous tax deductions
Miscellaneous deductions are deductions that do not fit into other categories of the tax code. There are two types of miscellaneous deductions: Deductions subject to the 2% limit (allows you to deduct only the amount of expense that is over 2% of your Adjusted Gross Income, or AGI) and deductions not subject to the 2% limit. Miscellaneous deductions which exceed 2% of your AGI will be eliminated for the tax years 2018-2025. This includes deductions for unreimbursed employee expenses and tax preparation expenses. This also means expenses that you incur in your job that are not reimbursed like tools, supplies, required uniforms, dues, subscriptions and job search expenses are no longer deductible. It’s important to remember that this only affects taxpayers who claim an employee-related deduction on Schedule A. If you are a business owner, you typically file a Schedule C and so your business-related deductions are not affected.
Before the Tax Cuts and Jobs Act, taxpayers could deduct the reasonable costs of moving household goods and personal effects, along with the travel costs of moving to the new home (excluding meals) if they qualified. But under the new tax law, moving expenses are suspended as a deduction. That means there is no longer a moving expenses deduction available to employees who are not reimbursed by their employers. This change goes into effect for tax years beginning after December 31, 2017, through December 31, 2025. The only exception to the new law is for taxpayers who are members of the military on active duty who move pursuant to a military order. If you moved during 2017, you can still deduct moving expenses on your 2017 tax return filed in 2018.
Personal casualty or theft
A casualty loss occurs when there is property damage from a sudden, unanticipated event, not from gradual, progressive damage. Examples of events qualifying as a casualty include: natural disasters like hurricanes, tornadoes, floods, storms, volcanic eruptions, vandalism, fires, car accidents, theft, and attacks. Previously, taxpayers could deduct their losses on their tax return. Now under the Tax Cuts and Jobs Act, the itemized deduction for personal casualty and theft losses has been suspended. Before the Tax Cuts and Jobs act, losses were deductible to the extent they exceeded $100 per event. There is an exception to the changes made by the Tax Cuts and Jobs Act, that is when a taxpayer has a gain as a result of another casualty in which case the loss would be allowed to the extent of another casualty gain.
If you aren’t sure how to file your 2018 tax return, or need help navigating all the changes, Polston Tax can help. Our team of experience tax lawyers and tax accountants have studied the new tax law changes and can help you figure out the best plan for you financially. Give us a call at 844-841-9857 or click below to schedule a free consultation.