New law brings changes to 2018 income tax returns

Sarah J. Fischer
Sarah J. Fischer

Now that we’re more than half way through 2018, it’s a good time to review some of the changes imposed under the Tax Cuts and Jobs Act enacted in December.

While most of the changes didn’t affect your 2017 income tax return, they will come into play when you file for 2018. Most TCJA changes are temporary and expire after 2025.

Your deductions will be different on your 2018 tax returns. Individuals will reduce their gross income by various deductions to arrive at taxable income. TCJA simplifies and reforms many of these personal income deductions.   

Let’s review some of the changes you can expect when you prepare your tax return for 2018:

Personal exemptions repealed. For 2017, a $4,050 deduction was allowed for each taxpayer, spouse and qualified dependent, with phase-outs in the total amount of the exemption deduction for higher income taxpayers. For 2018, personal exemptions are eliminated.

Standard deductions increased. In addition to personal exemptions, taxpayers reduce their adjusted gross income by either a standard deduction based on filing status or a sum of itemized deductions, whichever is larger. This holds true in 2018, although there have been many changes here as well. For 2017, the standard deduction was $6,350 for single taxpayers, $12,700 for married couples filing joint returns and $9,350 for heads of household. For 2018, the standard deductions will increase to $12,000 for single taxpayers, $24,000 for married couples filing joint returns and $18,000 for heads of households.

Itemized deductions changed. There will be numerous changes for taxpayers who itemize their deductions. For 2017, high-income taxpayers were subject to a phase-out of their itemized deductions. For 2018, the high-income taxpayer phase-out was repealed.

In addition, itemized deductions were changed for mortgage interest, home equity loans, state and local income and property taxes, charitable donations, casualty and theft losses and miscellaneous items.

For 2017, taxpayers could deduct home mortgage interest on acquisition debt up to $1 million as well as interest on a home equity loan up to $100,000 regardless of what the proceeds were used for. For 2018, the home mortgage interest deduction remains in place with the limit for acquisition indebtedness now $750,000. However, there’s a grandfathered provision and will only apply to debt incurred after Dec. 15, 2017. Interest on a home equity loan is no longer deductible unless proceeds were used for residence improvements.

For 2017, taxpayers could deduct all state and local income, personal property and real estate taxes. For 2018, the maximum amount allowed for this deduction is $10,000.

For 2017, deductions for charitable donations were limited to 50 percent of adjusted gross income. For 2018, deductions for charitable donations will be limited to
60 percent of AGI.

For 2017, taxpayers could deduct personal casualty losses for most unexpected events, including accidents, fires and thefts. For 2018, deductions for casualty losses will only be allowed in federally declared disaster areas.

For 2017, taxpayers could take miscellaneous itemized deductions for such things as unreimbursed business and job expenses, investment expenses, certain legal fees and tax preparation expenses. For 2018, these deductions have been eliminated.

Qualified business income deduction. If you’re a business owner — a sole proprietor, LLC member, partner or S corporation shareholder — you could be allowed a brand new deduction to reduce your taxable income on your individual income tax return.  The deduction equals 20 percent of what’s termed qualified business income. This new deduction is complex and will be a large part of planning this year for business owners to see if and how they will qualify.

Clearly, your tax situation could look different in 2018. In fact, there are other changes for which to consider and plan. Review your circumstances with your Certified Public Accountant to determine how federal tax reforms affect you and if there are opportunities to plan for these changes.