Important Information For 2017/2018
Standard deduction and personal exemption
Yes, the standard deduction has roughly doubled for all filers, but the valuable personal exemption has been eliminated. For example, a single filer would have been entitled to a $6,500 standard deduction and a $4,150 personal exemption in 2018, for a total of $10,650 in income exclusions. Under the new tax plan, they would just get a $12,000 standard deduction. Is it better? Yes.
Comparison between the standard deductions of the new and old tax laws.
|Tax Filing Status||Previous Standard Deduction (Set to take effect in 2018)||New Standard Deduction|
|Married Filing Jointly||$13,000||$24,000|
|Married Filing Separately||$6,500||$12,000|
|Head of Household||$9,350||$18,000|
Tax breaks for parents
Child Tax Credit, which is available for qualified children under age 17. Specifically, the bill doubles the credit from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400.
If your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.
Furthermore, the Child and Dependent Care Credit, which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable. You can’t use both of these breaks to cover the same child care costs, but with the annual cost of child care well over $20,000 per year for two children in many areas, it’s safe to say that many parents can take advantage of the FSA and credit, both of which remain in place.
Education tax breaks
Earlier versions of the tax bill called for reducing or eliminating some education tax breaks, but the final version does not. Specifically, the Lifetime Learning Credit and Student Loan Interest Deduction are still in place, and the exclusion for graduate school tuition waivers survives as well. One significant change is that the bill expands the available use of funds saved in a 529 college savings plan to include levels of education other than college. In other words, if you have children in private school, or you pay for tutoring for your child in the K-12 grade levels, you can use the money in your account for these expenses.
Mortgage interest, charitable contributions, and medical expenses
- First, the mortgage interest deduction can only be taken on mortgage debt of up to $750,000, down from $1 million currently. This only applies to mortgages taken after Dec. 15, 2017, preexisting mortgages are grandfathered in. And the interest on home equity debt can no longer be deducted at all, whereas up to $100,000 in home equity debt could be considered.
- Next, the charitable contribution deduction is almost the same, but with two notable changes. First, taxpayers can deduct donations of as much as 60% of their income, up from a 50% cap. And donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.
- Finally, the threshold for the medical expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. In other words, if your adjusted gross income is $50,000, you can now deduct any unreimbursed medical expenses over $3,750, not $5,000 as set by prior tax law. Unlike most other provisions in the bill, this is retroactive to the 2017 tax year.
The State and local tax deduction
The final version of the bill keeps the deduction, but limits the total deductible amount to $10,000, including income, sales, and property taxes.
Deductions that are disappearing
Gone for the 2018 tax year are the deductions for:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Other miscellaneous deductions previously subject to the 2% AGI cap
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
The pass-through deduction — does it apply to you?
The new tax code makes a big change to the way pass-through business income is taxed. This includes income earned by sole proprietorships, LLCs, partnerships, and S corporations.
Under the new law, taxpayers with pass-through businesses like these will be able to deduct 20% of their pass-through income. In other words, if you own a small business and it generates $100,000 in profit in 2018, you’ll be able to deduct $20,000 of it before the ordinary income tax rates are applied.
There are phaseout income limits that apply to “professional services” business owners such as lawyers, doctors, and consultants, which are set at $157,500 for single filers and $315,000 for pass-through business owners who file a joint return.
Alternative minimum tax
So, the tax reform bill permanently adjusts the AMT exemption amounts for inflation in order to address this problem, and makes them significantly higher initially in 2018. Here’s how the AMT exemptions are changing for 2018.
|Tax Filing Status||2017 AMT Exemption Amount||2018 AMT Exemption Amount|
|Single or Head of Household||$54,300||$70,300|
|Married Filing Jointly||$84,500||$109,400|
|Married Filing Separately||$42,250||$54,700|
The bill lowers the corporate tax rate to a flat 21% on all profits. This is not only a massive tax cut, but is a major simplification as compared to the 2017 corporate tax structure.
|Taxable Income Range||Marginal Corporate Tax Rate (2017)|
|$18,333,333 and above||35%|
2018 tax brackets
|Marginal Tax Rate||Single||Married Filing Jointly||Head of Household||Married Filing Separately|
|37%||Over $500,000||Over $600,000||Over $500,000||Over $600,000|
Capital gains taxes
The general structure of the capital gains tax system, which applies to things like stock sales and sales of other appreciated assets, isn’t changing. However, there are still a few important points to know.
For starters, short-term capital gains are still taxed as ordinary income. Since the tax brackets applied to ordinary income have changed significantly, as you can see from the charts above, your short-term gains are likely taxed at a different rate than they formerly were.
Also, under the new tax law, the three capital gains income thresholds don’t match up perfectly with the tax brackets. Under previous tax law, a 0% long-term capital gains tax rate applied to individuals in the two lowest marginal tax brackets, a 15% rate applied to the next four, and a 20% capital gains tax rate applied to the top tax bracket.
Instead of this type of structure, the long-term capital gains tax rate income thresholds are similar to where they would have been under the old tax law. For 2018, they are applied to maximum taxable income levels as follows:
|Long-Term Capital Gains Rate||Single Taxpayers||Married Filing Jointly||Head of Household||Married Filing Separately|
|0%||Up to $38,600||Up to $77,200||Up to $51,700||Up to $38,600|
|20%||Over $425,800||Over $479,000||Over $452,400||Over $239,500|
2018 tax withholding change from IRS:
December 26, 2017
The IRS is working to develop withholding guidance to implement the tax reform bill signed into law on December 22. We anticipate issuing the initial withholding guidance in January, and employers and payroll service providers will be encouraged to implement the changes in February. The IRS emphasizes this information will be designed to work with the existing Forms W-4 that employees have already filed, and no further action by taxpayers is needed at this time.
Use of the new 2018 withholding guidelines will allow taxpayers to begin seeing the changes in their paychecks as early as February. In the meantime, employers and payroll service providers should continue to use the existing 2017 withholding tables and systems.
Private Debt Collection
The IRS began a new private collection program of certain overdue federal tax debts selecting four contractors to implement it.
The IRS will always notify a taxpayer before transferring their account to a private collection agency (PCA). First, the IRS will send a letter to the taxpayer and their tax representative informing them that their account is being assigned to a PCA and giving the name and contact information for the PCA. This mailing will include a copy of Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.
Only four private groups are participating in this program: CBE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, Calif.; and Pioneer of Horseheads, N.Y. The taxpayer’s account will only be assigned to one of these agencies, never to all four. No other private group is authorized to represent the IRS.