Tax Reform Guide

2018 Tax Reform Guide

The Tax Cuts and Jobs Act (TCJA) was signed into law at the end of 2017. It has brought several changes to the U.S. tax law. This year most Taxpayers are expected to benefit with the New Changes.

Having said that let’s discuss the 10 tax changes you need to know for 2018.

1.The Standard Deduction has almost doubled.

  • The Internal Revenue Service (IRS) standard deduction is the portion of income that is not subject to tax and can be used to reduce your tax bill.
  • You can only take the standard deduction if you do not itemize your deductions using Schedule-A of Form 1040 to calculate taxable income.
  • The amount of your standard deduction is based on your filing status, age and whether you are disabled or claimed as a dependent on someone else’s tax return.

Standard deductions for various filing status is given in the following table.

Single $12000/-
Married Filing Jointly $24000/-
Married Filing Separately $12000/-
Qualifying Widow(er) with Dependent Child $24000/-
Head Of Household $18000/-
  • Note that there is an additional standard deductionfor elderly and blind taxpayers, which is $1,300 for the tax year 2018. This amount increases to $1,600 if the taxpayer is also unmarried.

2.The Tax exemption has been eliminated.

A tax exemption is an attractive option for U.S. taxpayers. It can provide what most taxpayers want the most – to keep more of their income in their pockets and less of it in Uncle Sam’s.

  • Simply stated, a tax exemption is an amount the Internal Revenue Service allows taxpayers to subtract from their annual taxable income, expressed on their tax return.
  • For the Tax-Year 2017 IRS allowed $4050/- as Tax Exemption, But the bad news is that the Tax exemptions are no longer available from tax-year 2018.

3.The Child Tax Credit has been doubled.

Under the Tax Cuts and Jobs Act (TCJA) the following new child tax credit rules will take place in 2018:

  • The Child Tax Credit under 2018 tax reform is worth up to $2,000 per qualifying child. The age cut-off remains at 17 (the child must be under 17 at the end of the year for taxpayers to claim the credit).
  • The refundable portion of the credit is limited to $1,400. This amount will be adjusted for inflation after 2018.
  • The beginning credit phase-out for the child tax credit increases in 2018 to $200,000 ($400,000 for joint filers).
  • The child must have a valid SSN to qualify for the $2,000 Child Tax Credit.

4.Credit for Other Dependents.

As with many Tax Cuts and Jobs Act changes, taxpayers are learning certain provisions available to them in the past have been modified or eliminated, but new provisions have been created giving taxpayers different options to reduce their taxable income or tax liability. Such is the case with the credit for other dependents.

What Is the Credit for Other Dependents?

The credit for other dependents is a new $500 personal tax credit:

  • The credit is worth $500 for each qualifying dependent.
  • The credit is nonrefundable. It is claimed on line 12 of the 2018 Form 1040.
  • Phase-out begins for taxpayers with AGI of $200,000 ($400,000 for joint filers).
  • Unlike the child tax credit, the dependent does not require a valid SSN (an ITIN will be sufficient) for the taxpayer to claim the credit for other dependents.
  • You can claim this tax credit for every qualifying dependent who doesn’t qualify for Child Tax Credit.

5.Home Mortgage Interest Deduction.

  • If you buy a home between 2018 and 2026, you can deduct the interest on up to $750,000 in mortgage debt used to purchase or improve it as an itemized deduction.
  • This cap affects home purchases made after December 14, 2017.
  • Anyone who took out a mortgage on December 14 or earlier will be able to deduct interest on up to $1 million in debt, the old cap, for that home, even if they refinance to get a lower rate.

6.Moving Expenses are no longer deductible.

  • If you moved for work-related reasons in 2017, you might be able to deduct some of the costs on your 2017 return, even if you don’t itemize deductions.
  • If your employer reimbursed you for moving expenses, that reimbursement might be excludable from your income.
  • The bad news is that, if you move in 2018, the costs won’t be deductible, and any employer reimbursements will probably be included in your taxable income.
  • However, Employer payments or reimbursements in 2018 for moving expenses incurred by employees prior to 2018 are excluded from the employee’s wages for income and employment tax purposes.

7.State and Local Tax Deduction has been limited.

  • The State and Local Tax Deduction is commonly known as SALT Deduction.
  • Most state and local income taxes are still deductible as itemized deductions.
  • The only adjustment to the state and local tax deduction is the dollar amount you can deduct.
  • The deduction is capped at 10,000 dollars for the full tax year. That means you can deduct up to $10,000 in property and income tax or sales tax on Schedule A. Previously, the deduction was unlimited.
  • The cap for a married person filing separately is $5,000.

8.Contribution limits for retirement savings.

The following are some of the changes under the new law.

  • You can now contribute up to $18,500 towards your 401k from your paycheck.
  • Taxpayers whose age is 50 and older can save even more by making what’s called a “catch-up” contribution. That’s limited to $6,000 a year, for a total of $24,500.
  • These limits don’t include the matching contribution you may receive from your employer.
  • Taxpayers can even deduct their contributions to a traditional IRA if they meet certain conditions.
  • If during the year either the taxpayer or their spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor their spouse is covered by a retirement plan at work, the phase-outs of the deduction do not apply.).

9.Job Expenses and other miscellaneous expenses are no longer deductible.

Miscellaneous deductions which exceed 2% of your AGI will be eliminated for the tax years 2018 through 2025.

  • This includes deductions for unreimbursed employee expenses and tax preparation expenses.
  • To be clear, it includes expenses that you incur in your job that are not reimbursed, like tools and supplies; required uniforms not suitable for ordinary wear; dues and subscriptions; and job search expenses.
  • These expenses also include unreimbursed travel and mileage, as well as the home office deduction.

10.Deduction for Casualty and theft losses.

  • Under the old tax code, you were able to claim an itemized deduction for property losses that aren’t reimbursed by insurance and that occur unexpectedly.
  • This would include damage from fire, accidents, theft and vandalism, as well as natural disasters.
  • You were able to deduct the losses to the extent they exceed 10 percent of your adjusted gross income.
  • Now, you can only claim personal casualty losses if the damage is attributable to a disaster declared by the president. The 10 percent threshold of AGI still applies.