We are now half way through 2018 – as such, this is a good time to readdress the tax reform changes under the new Tax Cuts and Jobs Act (TCJA), which became law in December 2017.
Most (if not all) of the changes in the TCJA did not affect your 2017 tax return – however they will come into play when you file for 2018. It is important to mention, most the TCJA changes are temporary and will sunset or revert to old law after 2025.
There are numerous differences in how your deductions will look on your 2018 income tax returns as compared to your 2017 tax return. Individual taxpayers get to reduce their gross income by various deductions to arrive at taxable income. TCJA simplifies and reforms many of these personal income deductions. Let’s review some highlights of changes you can expect when you prepare your tax return this year.
Personal Exemptions – repealed
In 2017 – a deduction was allowed in the amount of $4,050 for each taxpayer, spouse and qualified dependent, with phase-outs in the total amount of the exemption deduction for higher income tax payers.
In 2018 – personal exemptions are eliminated.
In addition to personal exemptions, taxpayers have been able to reduce their adjusted gross income by either a standard deduction based on filing status (single, married filing joint, etc.) or a sum of itemized deductions (things like medical expenses, mortgage interest, charitable donations certain taxes etc.), whichever is larger. This is still true in 2018, however there have been many changes here as well.
Standard Deductions – increased
In 2017 – the standard deduction amount for a single taxpayer was $6,350, $12,700 for a married filing joint return, and $9,350 for a head of household return.
In 2018 – the standard deductions will substantially increase; single taxpayers will be $12,000, $24,000 for a married filing joint return, and $18,000 for a head of household return
For those taxpayers who itemize their deductions there will be numerous changes.
Itemized Deductions – modified
In 2017 – high income tax payers were subject to a phase-out of their itemized deductions (also known as the Pease limitation).
In 2018 – the high-income taxpayer phase-out was repealed entirely.
Furthermore, the following itemized deductions were changed:
In 2017 – you could deduct home mortgage interest on acquisition debt up to $1 million.
– you could deduct interest on a home equity loan (HELOC) up to $100,000 – regardless of what the proceeds were used for.
In 2018 – the TCJA generally retains the home mortgage interest deduction, with a few changes. The limit for acquisition indebtedness is now $750,000 (rather than $1 million). However, there is a grandfathered provision and this will only apply to debt incurred after December 15, 2017.
– HELOC interest is no longer deductible (unless proceeds used for residence improvements).
State & Local Income & Property Tax
In 2017 – taxpayers could deduct ALL personal property, real estate and state & local income taxes paid during the year without any limits.
In 2018 – the maximum amount allowed for this deduction is $10,000.
Miscellaneous Itemized Deductions
In 2017 – taxpayers could take miscellaneous itemized deductions for things like unreimbursed business/job expenses, investment expenses, certain legal fees and tax prep expenses.
In 2018 -these miscellaneous itemized deductions have been eliminated entirely.
In 2017 – charitable donations were limited to 50% of Adjusted Gross Income (AGI) for the year.
In 2018 – charitable donations will be limited to 60% of AGI.
Casualty & Theft Losses
In 2017 – individuals could deduct personal casualty losses for most any unexpected event (theft, accidents, fire, etc.).
In 2018 – casualty losses will only be allowed for a federally declared disaster area.
Qualified Business Income Deduction – new
If you are a business owner (sole proprietor, LLC member, partner or S-corporation shareholder) you will potentially be allowed a brand-new deduction (aka 199A deduction) to reduce your taxable income on your individual income tax return. The deduction equals 20% of “Qualified Business Income”. This new deduction is quite complex and will be a large part of planning this year for business owners to see if and how they will qualify for this new deduction.
As you can see, in 2018 your tax situation may look different. In addition to the above there, are numerous other tax reform changes to plan for and be aware of. As such, it may be a good opportunity to review your tax circumstances with your CPA to see how tax reform will impact you and if there are any opportunities to plan for these changes.
Sarah J. Fischer, CPA, is a tax manager with Dalby Wendland & Co., P.C., in Grand Junction, CO. She specializes in tax planning and preparation services for individuals and private companies in several industries, including auto dealerships, construction, manufacturing, and medical practices. She is a member of American Institute of CPAs and Colorado Society of CPAs. Sarah holds a bachelor’s degree in business administration with an emphasis in accounting from Colorado State University, Ft. Collins.