Tax Cuts and Job Act (TCJA) Impacts on 2018 Tax Returns-Part I

Highlights:
1. Virtually all taxpayers are impacted by the changes
2. Changes take effect on January 1, 2018 and run through 2025. In 2026, unless extended, these provisions will revert to the rules in effect for tax year 2017.
3. Going forward, some of these provisions may be modified or made permanent
4. Those who itemize may find deductions are not greater than the new standard deduction, and several deductions have been eliminated or limited
5. Taxpayers with children have changes to child-related tax benefits

This article is a summary of the changes we feel will impact our clients the most. It is not intended to discuss all of the changes that occurred under this tax reform act.

Tax Brackets:

Most taxpayers will fall into a lower tax bracket, as compared to tax year 2017. While most taxpayers will pay less, those in an upper-middle class tax bracket (32%-35%) may pay a slightly higher tax rate. Go to our website for tax bracket comparisons.

Standard Deduction and Exemptions:

Personal, spouse and child exemption amounts have been eliminated. This change eliminates any arguments over who is claiming the kids for tax years 2018 through 2025. For 2017, each exemption amount reduced taxable income by $4,000.

However, the standard deduction has been increased:
Filing Status                                             2017        2018
Single                                                     $ 6,350   $12,000
Married Joint/Surviving Spouse        $12,700   $24,000
Married Separate                                 $ 6,350   $12,000
Head of Household                               $ 9,350   $18,000

Those taxpayers who typically itemize deductions may find it hard to exceed the new standard deduction amount. In addition, this may impact larger families due to the loss of the exemptions for dependents. (See Itemized Deductions and Child and Dependent Benefits below)

Child and Dependent Benefits:

Child Tax Credit: Available for qualifying children under age 17, is increased from $1,000 to $2,000 per qualified child through 2025. In addition, the refundable portion of the credit is increased from $1,000 to $1,400. This means that taxpayers that do not have any tax can still claim up to $1,400 per qualified child.. More higher income taxpayers may be able to take advantage of this credit due to increases in modified adjusted gross income thresholds for the phase out of this credit.

Non-Child Dependent Credit: Taxpayers can claim a new $500 nonrefundable credit for children who are too old for the child tax credit, as well as for non-child dependents. Like the Child Tax Credit, this credit is subject to phase out for those with modified adjusted gross incomes over $200,000 for single taxpayers or $400,000 for married taxpayers.

Adjustment to Income Deductions:

• Fully Eliminated:

o Alimony: For orders executed after 12/31/18, alimony is no longer deductible by the payor, nor taxable to the recipient. (Payments under existing orders are grandfathered and are deductible by the payor and reported as income to the recipient).
o Tuition and Fees Deduction
o Domestic Production Activities Deduction
o Moving expenses: There is no deduction and employer reimbursed moving expenses are now reported as income for non-military personnel.

• Stays the Same:

o Educator Expense Deduction
o Student Loan Interest
o Health Savings Account Deduction
o IRA Deduction
o Deductions for Self-Employed (SE tax, SE health insurance, SE qualified retirement plan contributions)

Itemized Deductions:

• Fully Eliminated:

o Miscellaneous Itemized Deductions:

 Employee business expenses (unreimbursed employee expenses like mileage and home office)
 Investment advisory fees and interest expense
 Tax preparation fees
 Union dues
 Safe deposit boxes
 Personal casualty losses outside a Federally designated disaster area

o Pease Limit: Itemized deductions are no longer limited for higher income taxpayers

• Limited:

o State and Local Taxes: The deduction for state and local income taxes plus real property taxes is limited to a combined maximum of $10,000 ($5,000 married filing separately)
o Home Mortgage Interest:

 Home equity loan interest is no longer deductible.
 For new home mortgages taken out after 12/14/17 the interest deduction is limited to interest paid on a maximum of $750,000 ($375,000 married filing separately).
 Mortgages (including refinancing) taken out before 12/14/17 are grandfathered and taxpayers can continue to claim mortgage interest on up to $1 million of debt ($500,000 married filing separately).

o Modified:

 Charitable Contributions: This maximum deduction has been increased from 50% to 60% of adjusted gross income
 Gambling Losses: All deductions for losses incurred in carrying out wagering and gambling activities are limited to the extent of gambling winnings.
 Medical Expenses: For tax years 2017 and 2018, expenses are deductible to the extent they exceed 7.5% of adjusted gross income. In 2019, the threshold will increase to 10%.

Education Benefits:

• American Opportunity Credit: Remains the same.
• Lifetime Learning Credit: Remains the same.
• Tuition and Fees Deduction: Eliminated
• Educational Finances: Taxpayers can continue to use 529 and Coverdell education savings plans, savings bonds, and employer educational assistance programs.

o 529 Plans:

 Can be used for K-12 expenses
 Plans can distribute up to $10,000 per year for enrollment at a public, private or religious elementary or secondary school
 The $10,000 limit is applied on a per student basis

o Student Loans:

 The student loan interest deduction remains unchanged, up to a maximum of $2,500
 Student loans cancelled after 12/31/17 because of death or disability are excluded from gross income

Health Care Penalty:

Taxpayers who do not have coverage for tax years 2017 and 2018 till continue to owe a penalty for those years unless they qualify for an exemption. The penalty will be eliminated for tax year 2019.

You should take these next steps to ensure a smooth transition from 2017 to 2018 and to help avoid refund or balance due surprises:

• Consult with your financial advisor. There are several changes in pension plan and IRA contribution limits, IRA recharacterizations, rollover periods for plan loan offset amounts, and other securities activities that are too complex to mention here.
• Verify that your W-4 withholding is correctly reported to your employer. There is a withholding calculator on our website. Please note that at the time of this article, the IRS is working to update this calculator with the new withholding tables.
• For self employed individuals, ask us to run a proforma return using the 2018 changes to adjust estimated tax payments. Give us a call to discuss pricing.

We will cover the changes that affect businesses in Part II.