With tax season quickly approaching, it may be helpful to review the major changes in the tax laws stemming from the “Tax Cuts and Jobs Act” that began in 2018 as well as some new changes for 2019. It is good practice to plan for any financial adjustments you might want to make resulting from the new laws and to be aware of future changes so you won’t be caught off guard.
**New Tax Law (2018) Major Changes**
1) Tax Rates and Brackets: The amount of individual income tax brackets is still seven, but the rates and income levels they apply to have changed.
2) Individual Alternative Minimum Tax: The exemption amount for single filers increased to $70,300 and will phase out at $500,000. The exemption amount for joint filers increased to $109,400 and will phase out at $1,000,000.
3) Standard Deduction: The standard deduction has nearly doubled to $12,000 for single taxpayers, $18,000 for heads of households, and $24,000 for married joint filers.
4) Personal Exemption: The new tax law eliminated this altogether.
5) Child Tax Credit: This credit has increased up to $2,000 per child and up to $1,400 of the $2,000 Child Tax Credit can be refundable. The beginning credit phaseout for the credit increased to $200,000 for single filers and $400,000 for joint filers.
6) State and Local Taxes: An individual's itemized deductions are capped at $10,000.
7) Mortgage Interest Deduction: The deduction is limited to interest on the first $750,000 you borrow on loans established after December 31, 2017. No deduction is permitted for any home equity loans.
8) Limits on Itemized Deductions: The limits have been eliminated.
9) Inflation Rate Adjustments: The inflationary adjustment calculation changed from “CPI index” to a “Chained-CPI index”, which is considered a more accurate measurement tool for inflation.
10) Estate Tax: The exemption amount has nearly doubled for estate, gift, and generation-skipping taxes to a $10 million base.
11) Corporate Taxes: The corporate tax rate has been lowered from 35% to 21%.
12) Pass-Through Business Income: Owners of pass-through businesses can deduct up to 20% of their net business income from their income taxes, with limits of $157,500 for single filers and $315,000 form married joint filers. This is scheduled to last through 2025.
13) Recharacterization of a Roth IRA Conversion: The ability to recharacterize any Roth IRA conversions has been removed. You can still recharacterize your 2017 Roth IRA conversions up until October 15, 2018.
**Changes for the 2019 Tax Year**
1) Alimony Deduction Is Being Eliminated: Currently, individuals who make alimony payments are able to deduct that money from his or her federal taxes. This deduction will be eliminated for any divorce commencing after December 31, 2018. Also, the recipient of the money will no longer pay taxes on that income.
2) Revised 1040 Form: The IRS plans to simplify and shorten the 1040 Form. It will be about half the size of the previous version and would replace the current form 1040 as well as the form 1040A and 1040EZ.
3) The Affordable Care Act: There will be no penalty for failing to have health insurance.
4) Higher Bar for Medical Deductions: For the 2018 tax year, you can deduct qualified medical expenses that exceed 7.5% of your adjusted gross income. Beginning in 2019, this will rise to 10% of your adjusted gross income.
Tips:
Useful calculators to perform a quick “paycheck checkup”
Turbotax has created a free calculator that shows how the new tax laws will impact you based on your specific situation.
To review how the new tax laws make 529 savings plans more beneficial, please refer to the RetirementKnowledge.Education article “Tax Cuts and Jobs Act Make 529 Plans More Flexible”.
If you are inclined to do charitable giving, consider “bunching” your charitable deduction and make 2 years worth of donations in a single year. This may help you to reach the amount required to itemize deductions.
Consider a Qualified Charitable Distribution (QCD) if you are taking your Required Minimum Distributions from a Traditional IRA and plan on making charitable donations. Amounts distributed as a QCD can be counted toward satisfying your RMD amount for the year, up to $100,000, and will not be included in your taxable income. This is not the case with a regular withdrawal from an IRA, even if you use the money to make a charitable contribution on a later date.
Consulting with a tax professional may help to navigate the new and upcoming tax laws that will affect your personal situation and help determine any adjustments you can make to optimize your financial position.
Carol Chaudet
(Updated 11/13/2018)