As we roll up on the 2018 tax filing deadline, the jury is still out on how the Tax Cuts and Jobs Act (TCJA), passed in December 2017, will impact the average American tax return.
While you wait to learn how things will shake out for you, here’s a rundown of the changes that may have impacted you in 2018. It’s never too early to start thinking about next year.
Personal Exemptions and Standard Deduction
The TCJA repealed the personal exemption deductions, but nearly doubled the standard deduction amounts to $24,000 for joint filers, $18,000 for heads of household, and $12,000 for single individuals and married filing separately. Given the higher limits, most filers will now take the standard deduction. Because the standard deduction is generally claimed only when its amount exceeds available itemized deductions, the increases will not benefit you if you itemize.
Exemption for Dependents and Child Tax Credit
TCJA increased the child tax credit to $2,000 up from $1,000 under prior law; $1400 is refundable. The modified adjusted gross income threshold where the credit phases out is $400,000 for joint filers and $200,000 for all others (up from $230,000 and $115,000, respectively). The maximum age for a child eligible for the credit remains 16 (at the end of the tax year).
TCJA also provides a $500 nonrefundable tax credit for dependent children over age 16 and all other dependents. Most families with non-child dependents will lose some ground here, as the $500 credit will generally be less valuable than the $4,150 exemption deduction they received under the previous tax law.
Deduction for State and Local Taxes (SALT)
TCJA imposed a $10,000 limit on the deduction for state and local taxes, which can be used for both property taxes and income taxes (or sales taxes in lieu of income taxes) and repealed the deduction for foreign property taxes. Note, this mostly affects clients with valuable real estate. There was no limit on the amount of the SALT deduction under prior law.
Mortgage Interest Deduction
TJCA reduced to $750,000 the limit on the loan amount for which a mortgage interest deduction can be claimed by individuals, with existing loans grandfathered. TCJA also repealed the deduction for interest on home equity loans, unless the HELOC is used to upgrade the home. Previously, you could deduct HELOC interest regardless of the purpose.
Deduction for Medical Expenses
TCJA retained the deduction for unreimbursed medical expenses and enhanced it for 2017 and 2018 by lowering the adjusted gross income (AGI) floor for claiming the deduction from 10% to 7.5% for all taxpayers.
Deduction for Charitable Contributions
TCJA retained the charitable contribution deduction and increased the maximum contribution percentage limit from 50% of a taxpayer’s contribution base to 60% for cash contributions to public charities. If you are charitably inclined but will take the standard deduction, call us as soon as possible to see if you can benefit from gift bunching.
Repeal of Alimony Deduction
TCJA repealed the deduction for alimony paid and also the corresponding inclusion in income by the recipient, effective for tax years beginning in 2019. Alimony paid under separation agreements entered into prior to 2019 will generally be grandfathered under the old rules.
Alternative Minimum Tax
TCJA increased alternative minimum tax (AMT) exemption amounts and increased the income level where the exemption is phased out. Combined with the effects of other TCJA changes, many individuals who are currently subject AMT in 2017 will not be in 2018 and beyond.
Expanded Uses for 529 Plan Distributions
TCJA allows up to $10,000 in aggregate 529 distributions per year to be used for elementary and secondary school tuition. Under prior law, 529 distributions could only be used for higher education expenses. Beware though that Colorado state laws still follow the traditional 529 role of paying for college. Taking out funds for K-12 will be subject to state taxes.
Estate and Gift Tax Exclusion
TCJA doubled the basic exclusion amount for estate and gift tax purposes from $5.6 to $11.2 million per person or $22.4 million for married couples.
This isn’t a complete list of the TCJA changes, but don’t let confusion about the new law keep you from taking proactive steps for 2019 - whether that’s maximizing your 401(k) contributions or applying planning options around the new standard deduction, or converting some of your IRA investments to Roth accounts. While we do not offer tax advice, we invite you to sit down with us and discuss how these changes will impact your overall financial picture, and what strategies we can adopt to help you get the best possible outcomes under the new rules.
The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. While we are familiar with the tax provisions of the issues presented at this seminar, as Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional.
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