2018 tax changesTax Changes for 2018

The passing of the new tax law has many people worried as tax season quickly approaches. You can rest assured, these changes will not show on this year’s tax returns, they will affect your taxes you file in 2019. However, you should be aware of the 2018 tax changes since they will affect what choices you make in 2018. In this article, we will go over the tax changes that have been made so that you are fully informed and prepared as we enter this new year.

Tax Brackets

One of the most notable changes effects tax brackets. Most marginal taxation rates for 2018 are lower and most of the income levels are higher.

Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$500,000
37% $500,000 + $600,000 + $500,000 + $500,000 +

It is important to note that the new tax bracket structure will eliminate the marriage penalty for most people. If you are unfamiliar, the marriage penalty works as follows: under the 2017 tax bracket structure, two single people could earn $95,000 and be taxed at 25%. But if they were to marry their combined income would push them into the 28% tax bracket. The new married filing jointly tax brackets are almost exactly double, preventing the penalty. The only ones who do not avoid it are those in the highest two tax brackets.

Capital Gains

Under the tax changes, short term gains will still be taxed as ordinary income. But they will be taxed at a different rate due to the tax bracket changes. Changes to the long term tax rates according to income are set out in the table below.

Long Term Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
0% $0-$38,600 $0-$77,200 $0-$38,600 $0-$38,600
15% $38,600-$425,800 $77,200-$479,000 $38,600-$425,800 $38,600-$239,500
20% $425,800 + $479,000 + $425,800 + $239,500 +

Standard Deduction and Personal Exemptions

The standard deduction will be about double for everyone as illustrated in the chart below.

2017 2018
Single $6,350 $12,000
Married Filing Jointly $12,7000 $24,000
Head of Household $9,350 $18,000
Married Filing Separately $6,350 $12,000

Despite the higher standard deduction, the personal exemption no longer exists. This means, if you file single for 2017 you would have a $10,650 exclusion ($6,500 standard deduction + $4,150 personal exemption). But in 2018 you would just have the $12,000 standard deduction.
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Tax Breaks for Parents

In 2018 the child tax credit increases to help make up for the loss of personal exemptions. The credit increased from $1,000 to $2,000 for qualifying children under the age of 17. Up to $1,400 of that credit is refundable. Additionally, the phase-out threshold is increased from $75,000 to $200,000 for single filers and $110,000 to $400,000 for those married filing jointly.

There is also a $500 nonrefundable credit available for qualified children over 17 and elderly relatives you care for. The Child and Dependent Care Credit will also remain in effect. This credit will allow you to deduct up to $1,050 of qualifying care expenses for one child up to 13 and up to $2,100 for two children. You can also set aside up to $5,000 of pre-tax money in a dependent care flexible spending account to help cover care costs.

Tax Breaks for Education

The Lifetime Learning Credit and Student Loan Interest Deduction will remain in place. Additionally, the exclusion for graduate school tuition waivers will remain the same. The main change is that 529 funds can now pay for all levels of education, not just college. This would include private school tuition for grades K-12.

Other Tax Breaks

The mortgage interest deduction will essentially remain the same. But now the deduction only applies to a debt of up to $750,000. This starts with mortgages taken after December 15, 2017. Additionally, home equity interest is no longer deductible. Charitable contributions can deduct up to 60% of your income. But donations made to a college in exchange for the right of purchasing sporting event tickets are no longer permissible. The medical expense deduction threshold is up from 10% to 7.5% of your adjusted gross income. This change will apply to the 2017 tax year. So, it may be something you want to take advantage of this year.

Lost Deductions

2018’s tax changes also come with the loss of several deductions. These include:

  • Tax preparation expenses
  • Unreimbursed employee expenses
  • Employer subsidized parking and transportation reimbursement
  • Moving expenses
  • Casualty and theft losses (unless from a federal disaster)
  • Other miscellaneous deductions subject to the 2% adjusted gross income gap

Inflation

Under the tax changes, the Chained CPI is the new standard to calculate inflation. Chained CPI causes inflation to grow slower than the previously used CPI-U. This means that tax brackets and deductions will grow slower than before.

Summary

This is just a brief overview of some of the tax changes. To dispell any concern about the changes, take the time to meet with a qualified tax preparer to set yourself up for success in 2018. You can contact us by clicking here. Or you can schedule an appointment by clicking here.