Notable Tax Changes for Individuals in 2018
By Amy Smith, CPA
Now that we are in the midst of tax filing season, individuals are beginning to see how tax reform passed at the end of 2017 is impacting them. The impact can vary vastly depending on each taxpayer’s situation. This article will take a look at some of the most common effects of tax reform on individuals and planning opportunities surrounding these changes.
One of the items included in the Tax Cuts & Jobs Act (TCJA) was the nearly doubling of the standard deduction, which raised the married filing joint standard deduction to $24,000, head of household to $18,000 and $12,000 for other individuals. While doubling the standard deduction would have an impact on many individuals, the TCJA also had significant changes to itemized deductions. The summary below highlights some key changes to itemized deductions:
- State/Local/Property Taxes – Taxpayers are limited to a deduction of $10,000 for the combination of state, local and property taxes.
- Charitable Deductions – Cash contributions can be deducted up to 60% of adjusted gross income. Charitable contributions connected with college athletic events are no longer deductible.
- Mortgage Interest – For loans taken out after December 15, 2017, the acquisition indebtedness is capped at $750,000. Loans taken out prior to this date continue to have the $1,000,000 threshold. Home equity loans are no longer deductible, unless the proceeds were used to improve your primary residence.
- Miscellaneous Itemized Deductions – Taxpayers are no longer able to claim a deduction for items that fall into this category, such as investment management fees, unreimbursed employee expenses, and tax preparation fees.
With the increased standard deduction and limitation or elimination of several itemized deductions, the sum of many individuals’ itemized deductions is near the standard deduction amount. This means these individuals may no longer benefit from itemizing without planning involved, such as “bunching” charitable contributions. “Bunching” charitable contributions means the taxpayers give what they would normally give over two or more years in one year. In the “bunch year,” this increases the overall itemized deductions, over the standard deduction amount, and results in tax savings. This can be extremely valuable in a year where the taxpayer has additional income from a particular source or event.
Additionally, for those taxpayers that are over 70 ½ and taking required minimum distributions (RMD), they may want to consider having the custodian direct the RMD directly to a charity of choice. By doing this, the RMD is not included in taxable income and consequently the taxpayer does not take an itemized deduction for the contribution. This is impactful if the taxpayer would otherwise be taking the standard deduction.
The TCJA eliminated personal exemptions. Personal exemptions were the amount ($4,050 for 2017) allotted for each person in a household, including the taxpayer, spouse and any dependents. Conversely, the TCJA increased the child tax credit and associated income phase-out. The child tax credit has been increased to $2,000 per qualifying child, with $1,400 being refundable. The act also adds a $500 credit for a dependent that is not a “qualifying child.” The child tax credits will begin phasing out when modified adjusted gross income exceeds $400,000 for married filing joint, which is a significant increase over previous phase-outs. While the personal exemptions and child tax credit are not directly related, if the taxpayer has a qualifying child or children, the increased credit and income phase-out may offset the elimination of the personal exemptions.
While this article highlights some of the key changes affecting individual taxpayers under the Tax Cuts and Jobs Act, it does not encompass all of the changes that are affecting individual taxpayers. Therefore, we encourage you to reach out to your tax advisors to discuss how the act is impacting you.