If Howe & Kolodziej CPAs prepared your 2017 personal tax return, then we gave you an estimate of your 2018 tax results by applying the new tax law to your 2017 tax return numbers.
The estimate shows the change in your tax liability before any payments like withholding or quarterly estimate payments are applied.
Major changes to existing tax law are in effect for your 2018 tax return due in 2019.
But that does not stop opinions about the tax changes Gallup Poll on 2018 Tax Changes.
We question how any taxpayer can make a judgement on the 2018 tax law until they know the results of their 2018 tax return.
Most of the individual tax changes are temporary, expiring after 2025 unless they are extended by Congress.
Corporate tax changes are permanent.
2018 New Tax Law Personal Tax Changes
Here's a list of the most important changes....click to learn more.
5 Types of Interest Expense 3 Sets of New Rules
Mortgage & Home Equity Interest
CAPITAL GAINS ON HOME SALES
OLD RULE:
Homeowners can exclude up to $250,000 in gain for Single or Married Filing Separate status and up to $500,000 in gain for Married Filing Joint status.
You must have owned and primarily lived in the home for at least 2 of the 5 years before the sale.
The exclusion can only be claimed once in a 2 year period.
NEW RULE:
The only change is to how long you must live in the personal residence in order to exclude capital gains & how often the exclusion can be claimed.
If you sell your home after December 31, 2017 then you must have owned and primarily lived in the home for at least 5 of the 8 years before the sale.
The exclusion can only be claimed once in a 5 year period.
MORTGAGE & HOME EQUITY INTEREST
OLD RULE:
Mortgage interest deductions are allowed on mortgages valued up to $1 million on a taxpayer's principal residence and one other qualified residence.
Home equity loan or home equity line of credit interest on loans no greater than $100,000 are deductible.
NEW RULE:
Homeowners with mortgages encumbered in 2018 can deduct interest paid on loans up to $750,000.
The old $1 Million cap still applies if your mortgage was encumbered on or before December 15, 2017, as long as the new mortgage amount does not exceed the amount of debt being refinanced.
Home equity line of credit or home equity loan interest is deductible if the loan was used to buy, build or substantially improve your home.
These changes expire after 2025.
529 COLLEGE SAVINGS PLAN
OLD RULE:
Previously, 529 plan savings could only be used on qualified higher education expenses...AKA College.
NEW RULE:
You can now use 529 savings for private K-12 schooling.
Tax benefits are now extended to eligible education expenses for an elementary or secondary public, private, or religious school.
The new rules allow you to withdraw up to $10,000 a year per student (child) for education costs.
This is a substantial improvement over the old rules.
However, a 529 Plan contribution is not a tax deduction on your federal tax return.
It simply means that money in a 529 Plan earns interest and/or dividends tax free unless you withdraw it for non-educational purposes.
ALIMONY
OLD RULE:
The individual paying alimony or maintenance payments can deduct payments from their income.
The person receiving the payments includes them as income.
NEW RULE:
The person making alimony or maintenance payments does not get to deduct them, and the recipient does not claim the payments as income.
This goes into effect for any divorce or separation agreement signed or modified on or after Jan. 1, 2019.
You are "Grandfathered" in if your agreement was prior to January 1, 2019 & the "Old Rules" apply.
ALTERNATIVE MINIMUM TAX
AKA...the tax that every conservative CPA hates.
Not only because it's so difficult to explain how it works but because it punishes taxpayers who have achieved some level of financial success.
The AMT seems to be antithetical to the American dream of success....i.e., work hard & you will be rewarded.
The individual alternative minimum tax, or AMT, is often imposed on higher-income families, especially those with children, who live in high-tax states but not necessarily the ultra rich.
It requires many households or individuals to calculate their tax due under the AMT rules alongside the rules for regular income tax.
They have to pay the higher amount.
Whether or not someone pays AMT depends on their alternative minimum taxable income (AMTI).
AMTI is determined through a series of assessments of a taxpayer’s income and assets — the explanation of calculating AMTI takes up two pages in the tax bill, so we’re not getting into the details here. You are welcome!
OLD RULE:
Exemption Amounts:
$84,500 for married joint-filing couples, phasing out at $160,900
$54,300 for single filers phasing out at $120,700
$42,250 for married couples filing separately phasing out at $80,450.
What are "Exemption Amounts"?
The lower Exemption income amounts are the point at which the AMT rules begin to apply.
The higher Exemption income amounts are the point at which 100% of the AMT rules apply.
Confused?
Join the club.
Here's a link that hopefully will help your understanding of AMT....but we doubt it.
NEW RULE:
The AMT apparently is here to stay but fewer households will have to face it.
Under the new rules, which are in effect from Jan. 1, 2018 through Dec. 31, 2025:
Exemption Amounts:
$109,400 for married joint-filing couples, phasing out at $1,000,000.
$70,300 for single filers & married couples filing separately, phasing at at $500,000.
This is actually a HUGE tax cut under the 2018 tax law for taxpayers previously and currently subject to the AMT tax.
CHILD TAX CREDIT
OLD RULE:
The current child tax credit is $1,000 per child under the age of 17.
The credit is reduced by $50 for each $1,000 a taxpayer earns over certain thresholds.
The phase-out thresholds start at a modified adjusted gross income (AGI) over $75,000 for single individuals and heads of household, $110,000 for married couples filing jointly and $55,000 for married couples filing separately.
NEW RULE:
The child tax credit doubles to $2,000 per qualifying child.
Up to $1,400 of the child tax credit can be received as a refundable credit which means that you can get a refund even if you have zero tax liability.
The new rule also includes a $500 nonrefundable credit per dependent other than a qualifying child.
The credit begins to phase out at an AGI over $200,000 — for married couples, the phase-out starts at an AGI over $400,000.
This rule is in effect through 2025.
The credit begins to phase out at an AGI over $200,000 — for married couples, the phase-out starts at an AGI over $400,000.
This is a significant tax reduction for families with children under the age of 17 because of the expanded income thresholds which nearly quadruple from $110,000 to $400,000 and the doubling of the credit amount per child from $1,000 to $2,000.
This rule is in effect through 2025.
2% MISCELLANEOUS DEDUCTIONS
OLD RULE:
You could claim itemized deductions, the total of which exceeded 2% of Adjusted Gross Income, that included the following:
- Tax Preparation Expense
- Investment Fees
- Work Related Expenses
NEW RULE
The entire gamut of 2% Miscellaneous Deductions are no longer allowed through 2025.
MEDICAL EXPENSES
OLD RULE:
You could deduct out-of-pocket medical expenses that exceeded 10% of Adjusted Gross Income if you were under age 65.
If you were over age 65 then you could deduct medical expenses that exceeded 7.5% of Adjusted Gross Income.
NEW RULE:
All taxpayers are now subject to the 7.5% of Adjusted Gross Income threshold for deduction of itemized medical expense deductions.
MARRIAGE PENALTY
The "marriage penalty" is (mostly) gone.
If you're not familiar, here's a simplified version of how the marriage penalty works.
Let's say that two single individuals each earned a taxable income of $90,000 per year.
Under the old 2018 tax brackets, both of these individuals would fall into the 25% bracket for singles. However, if they were to get married, their combined income of $180,000 would catapult them into the 28% bracket.
Under the new brackets, they would fall into the 24% marginal tax bracket, regardless of whether they got married or not.
In fact, the married filing jointly income thresholds are exactly double the single thresholds for all but the two highest tax brackets in the new tax law.
In other words, the marriage penalty has been effectively eliminated for everyone except married couples earning more than $400,000.