The 2018 Federal Tax Law Changes You Need to Know

couple calculating taxes

Last year, President Trump signed a new tax-reform bill into law. This new law can have a substantial impact on individual taxpayers starting with the tax year 2018, for which returns are due to be filed by April 15, 2019. Some of the provisions that impact individuals are the following:

  1. The 2018 tax brackets, for the most part, reduce tax rates. For example, the tax rate for a married couple in 2018 will range from 10% on income of $0 to $1,950 to 37% on income over $600,000. This is a reduction from 2017, when the tax rate ranged from 10% for married couples earning $0 to $19,050 to 39.6% on income over $480,050.
  2. The standard deduction is almost doubled for all taxpayers. For example, the standard deduction for a single individual, or a married individual filing separately, has gone from $6,500 for tax year 2017 to $12,000 for tax year 2018. For a married couple filing jointly, the deduction has gone from $13,000 in 2017 to $24,000 in 2018.
  3. Although the standard deduction has increased dramatically, the personal exemption has been eliminated.
  4. The capital gains tax, which generally applies to sales of stocks and other appreciated assets, has not changed.
  5. The mortgage interest deduction now applies only to mortgage debt of up to $750,000. This is down from the $1,000,000 figure previously allowed. NOTE: This reduction only applies to mortgages taken after December 15, 2017. Mortgages that existed prior to that date are not affected.
  6. Charitable contributions changes are as follows:
    • Taxpayers can deduct donations up to 60% of their income. Under prior law, they could deduct only up to 50% of their income.
    • Donations to colleges in exchange for the right to purchase athletic tickets are no longer deductible.
  7. The medical expense deduction has been reduced from 10% of adjusted gross income to 7.5% of adjusted gross income. This change is retroactive to the 2017 tax year, which may require eligible taxpayers to file amended returns for 2017.
  8. Under the new law, state and local tax deductions, which include income, sales and property taxes, are limited to $10,000. This provision is controversial for its effects in high-tax states such as California and New York.
  9. Affordable Care Act penalties are repealed. Thus, individuals who don’t buy health insurance will no longer pay a tax penalty.
  10. There are big changes in the treatment of pass-through deductions. Under the new law, pass-through businesses such as partnerships, sole-proprietorships, and S corporations can deduct 20% of their pass-through income before ordinary income tax rates are applied. Certain limits apply to “professional services businesses” such as lawyers, doctors, consultants, and business owners who file joint returns.
  11. The Alternative Minimum Tax (AMT) provision has been changed in two ways:
    • The new law permanently adjusts the AMT exemption amount for
      inflation. For example, the AMT exemption amount for a married couple filing jointly in 2017 was $84,500. Under the new law, the amount for 2018 is $109,400.
    • The income threshold amount at which the exemption begins to phase out has significantly increased from $160,000 for joint filers and $120,700 for individuals, to $1,000,000 and $500,000, respectively.
  12. The new law doubles the estate tax exemption from $5.59 million per individual to $11.18 million. For married couples, the exemption has gone from $11.18 million to $22.4 million.
  13. Several deductions are eliminated under the new law:
    • Casualty and theft losses (except those from federally-declared disasters)
    • Unreimbursed employee expenses
    • Tax preparation expenses
    • Other deductions previously subject to the 20% Adjusted Gross Income cap
    • Moving expenses
    • Employer’s subsidized parking and transportation reimbursement.

Most of the tax changes listed above are temporary and under current law, are set to expire after the tax year 2025.

If you have questions, or if you are having difficulties dealing with the IRS, please contact the tax law attorneys at Bailey & Galyen.