New Tax Laws for 2018 – What You Need to Know
In December 2017, the Tax Cut and Job Acts was passed and signed into law. The controversial bill erases many long-time deductions and may affect your own tax preparation going forward. Horizons is passionate about the overall health of our community. This extends beyond our grantmaking to provide information to the financial backers of our work, knowing that strong organizations require strong donors.
Thank you to Aubrey Hone, D. Chris Kollaja, and Kevin Tusing for this overview of the new law and the types of changes that may affect your household’s financial standing. Aubrey, Chris, and Kevin are members of Horizons’ Professional Advisory Circle, a dedicated community of advisors who provide legal, tax, real estate, and insurance services, and financial planning, and are experienced in meeting the specific needs of LGBTQ clients.
The 2018 Tax Cut and Job Acts
New rate structure with seven tax brackets
- 10% (same as 2017)
- 12% (down from 15% in 2017)
- 22% (down from 25% in 2017)
- 24% (down from 28% in 2017)
- 32% (down from 33% in 2017)
- 35% (same as 2017)
- 37% (down from 39.6% in 2017)
- Highest rate is applicable to taxable income above $500,000 for single taxpayers and head of household, and $600,000 for married taxpayers filing jointly.
Increased Standard Deduction
- Standard deduction is nearly doubled for 2018 and will be indexed for inflation each year after 2018.
- Single & Married Filing Separately – $12,000 (up from $6,350 in 2017)
- Married Filing Jointly – $24,000 (up from $12,700 in 2017)
- Head of Household – $18,000 (up from $9,350 in 2017)
With these increases (and changes to itemized deductions discussed below) many more taxpayers will take a standard deduction rather than itemize.
Suspended Personal Exemption
- Starting in 2018 taxpayers can no longer claim personal or dependency exemptions.
- Note that in 2017 the exemption is subject to a phase-out that begins with adjusted gross incomes of $261,500 ($313,800 for married couples filing jointly). It phases out completely at $384,000 ($436,300 for married couples filing jointly).
Major Changes to Itemized Deductions
- State and Local Taxes – The itemized deduction for state and local income taxes AND property taxes combined is limited to a total of $10,000 starting in 2018.
- Mortgage Interest Deduction Limitations – Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million), starting with loans taken out as of 12/15/17.
- Loans used to acquire a principal residence and a second home in place prior to 2018 will keep the $1 million dollar limitation.
- Note the limitation is per taxpayer which increases the limitation for single co-owners / registered domestic partners.
- There is no longer any deduction for interest on home equity loans, regardless of when the debt was incurred.
- Miscellaneous Itemized Deductions – There is no longer a deduction for miscellaneous itemized deductions which were formerly deductible to the extent they exceeded 2 percent of adjusted gross income.
- The items no longer deductible are:
- tax preparation costs
- investment expenses
- union dues
- unreimbursed employee expenses
- The items no longer deductible are:
- Medical Expenses – For 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5 percent of adjusted gross income for all taxpayers.
- Previously, the AGI “floor” was 10% for most taxpayers and will return to 10% for tax years after 2018.
Overall Limitation on Itemized Deductions
- The new law suspends the overall limitation on itemized deductions that formerly applied to taxpayers whose adjusted gross income exceeded specified thresholds (e.g. $261,500 for single and $313,800 for married filing joint in 2017).
- The itemized deductions of such taxpayers were reduced by 3% of the amount by which AGI exceeded the applicable threshold, but the reduction could not exceed 80% of the total itemized deductions, and certain items were exempt from the limitation.
Other Individual Changes
- Alimony – For post-2018 divorce decrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse.
- Moving Expenses – The deduction for job-related moving expenses has been eliminated, except for certain military personnel.
- Health care “individual mandate” – Starting in 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage.
- Estate and gift tax exemption – Effective for decedents dying, and gifts made, in 2018, the estate and gift tax exemption has been increased to roughly $11.2 million ($22.4 million for married couples).
- Child and family tax credit – Credit increased to $2,000 from $1,000 and increases to $1,400 the refundable portion of the credit. Also includes a new (nonrefundable) $500 credit for a taxpayer’s dependents who are not qualifying children.
- Casualty and theft losses – The itemized deduction for casualty and theft losses has been suspended except for losses incurred in a federally declared disaster.
Need more help? A member of Horizons’ Professional Advisory Circle can help you dig deeper into the laws and help you make wise financial decisions. Visit our Directory of Professional Advisors.