There has been a lot of discussion over the last year about the Tax Cuts and Jobs Act and the impact it will have on our 2018 tax returns. Well, the 2018 filing season is here, so let’s take a look at some of the most impactful changes you’re likely to see on your returns.
Biggest Changes for 2018 Taxes
- No more personal or dependent exemptions. This means that a husband, wife, and two kids used to get an exemption of $16,200 ($4,050 per person); now that personal exemption amount is zero.
- To counteract the loss of personal and dependent exemptions, the standard deduction has been doubled. In 2017, a single filer’s standard deduction was $6,350. In 2018, it’s $12,000. In 2017, a married filing joint standard deduction was $12,700. In 2018, it’s $24,000.
- The top individual tax rate is 37% versus 39.6% in 2017.
- The child tax credit has been increased from $1,000 to $2,000 (with limits).
- Medical expenses in excess of 7.5% of AGI (adjusted gross income) are deductible in 2018.
- Moving expenses are no longer deductible if you move for your job.
- Miscellaneous itemized deductions are no longer deductible – these were casualty and theft losses, investment expenses, employee work expenses, etc.
- State and local taxes (SALT) are capped at $10,000 in total. This means if you have $7,000 withheld from your W-2 for state taxes, and you pay $4,000 in property taxes, you will only get to deduct $10,000.
Please note that California does not conform to these changes in federal law. They still have personal and dependent exemptions, and the old itemized deductions are still allowed for California. You also may find that the $24,000 standard deduction is more beneficial for federal taxes, but that you can still itemize for California and take more than their standard deduction of $4,401 and $8,802 for single and married filing joint taxpayers, respectively.
An Example of the Impact of Zero Exemptions and Higher Standard Deductions
Let’s get to the bottom line – what does this really look like on a return? I find that most of my clients are not impacted by the medical, SALT, and miscellaneous itemized deduction changes. The biggest changes I see are with the exemptions and the deductions. Let’s look at a few very basic examples using filers that take the standard deduction:
A single filer, with no kids, in 2017 would have had a $4,050 personal exemption and a $6,350 standard deduction for a total of $10,400. In 2018, that same filer will have a personal exemption of zero and a standard deduction of $12,000 for a net increase in deduction of $1,600.
A married couple filing joint, with no kids, in 2017 would have had a $8,100 personal exemption and a $12,700 standard deduction for a total of $20,800. In 2018, those same filers will have a personal exemption of zero and a standard deduction of $24,000 for a net increase in deduction of $3,200.
Both of these scenarios are pretty good. Now let’s throw some kids on there. A married couple filing joint with two kids in 2017 would have had $16,200 in personal and dependent exemptions and a standard deduction of $12,700, plus child tax credits of $2,000 ($1,000 for each child) for a total of $30,900. In 2018, that figure drops to just the $24,000 standard deduction and $4,000 in child tax credits ($2,000 for each child), which is a loss of $2,900.
This scenario doesn’t look so hot. But what you have to also remember is that the tax bracket thresholds are higher, and the rates are lower. This should, theoretically, help balance out some of that loss.
What are the New Tax Brackets and Rates?
I did a whole Facebook post on the comparison of the 2017 and 2018 tax brackets and rates, which you can see by clicking the link.
What is the Qualified Business Income Deduction?
I’ll go into more detail in a future blog post, but the Qualified Business Income Deduction, or QBID, is the new code Section 199A that gives a 20% reduction of taxable income to some businesses. This was enacted due to the lower corporate tax rate, which is now fixed at 21%. To pass along the savings to other business structures, the IRS is giving qualified businesses up to a 20% reduction of their taxable income. For example, if you have a sole proprietorship, partnership, or S-corporation, you could qualify for this deduction.
I hope this blog has shed a little light on what you can expect to see on your 2018 and future taxes. If you’d like to make an appointment to come in and go over your tax situation, please call or email me! Hope to see you soon.