This is the first full year with the impact of last year’s comprehensive tax reform legislation. The “Tax Cuts and Jobs Act” made significant changes for businesses and individuals. The goal was to promote economic growth, create more jobs, and make U.S. companies more competitive with the rest of the world.
In addition, this bill promised middle class tax relief and tax simplification. While Form 1040 has been reduced to the size of a large postcard, this came with six new supplemental forms that were once part of Form 1040 but are now new supporting schedules. So, whether this is simplification or not depends on the taxpayer – you be the judge.
Five Year-End Tax Planning Tips and Reminders for 2018
Besides the matter of simplification, there were several tax changes impacting individuals that will apply in 2018. Many of these changes influence whether your overall 2018 federal taxes will rise or fall compared with 2017. Here are several selected tax items for individuals to consider as 2018 winds up:
1. Overall Tax in 2018. Due to the lower individual tax rates next year, many taxpayers will see an overall tax reduction for 2018. Some of these tax savings, however, have already been enjoyed by taxpayers with lower payroll tax withholding during the year. Thus, some taxpayers with lower tax in 2018 may realize these savings with: (1) more net paychecks during the year; and (2) their refund when they file their 2018 tax returns. If an individual would prefer more of a tax refund each year when they file, they many need to re-evaluate their tax withholding for the 2019 year and submit a new Form W-4 with their employer.
2. Standard Deduction. One of the significant changes affecting taxpayers in 2018 is the nearly doubling of the standard deduction. For 2018, the standard deduction jumps to $24,000 (up from $12,700 for 2017) for a married couple filing jointly, and to $12,000 for a single taxpayer (up from $6,350 in 2017). This may lead to many taxpayers claiming the standard deduction and thus, not itemizing on Schedule A any longer.
Other taxpayers may want to explore the strategy of “bunching” their itemized deductions over say a two-year period. They will spend the amount over this two-year period; the only difference is when they incur their deductions. They might try to bunch two years of deductions into one year, and then in the following year, not pay any deductions, but instead claim the standard deduction. Over the two years, they could generate an overall tax savings with the same net cash outflow. Charitable contributions work well for taxpayers interested in a bunching strategy.
3. SALT Shaker – Changes in Itemized Deduction. As part of the tax reform bill, there were several changes in itemized deductions.
- First, the deduction for State and Local Taxes (SALT) will be capped at $10,000 in 2018. This applies to state income or sales taxes, and property taxes.
- Second, interest on home equity loans was previously allowed on loans up to $100,000. Beginning in 2018, this home equity interest expense will no longer be deductible and there is no grandfather rule for prior loans.
- Last, miscellaneous itemized deductions which had been allowed if they exceeded 2% of a taxpayer’s adjusted gross income will no longer be available starting in 2018.
4. Personal Exemption and Child Tax Credit. The personal exemption of $4,050 for a taxpayer, spouse, and dependent children will no longer be allowed in 2018. This change received little attention with the passage of last year’s tax bill. However, the child tax credit of $1,000 will be increased to $2,000 for 2018 and the phase-out range for this credit will be greatly expanded, thus allowing more tax benefit for this credit in 2018.
5. Alternative Minimum Tax (AMT). AMT has been the federal government’s ATM machine, generating sizable tax revenue while also aggravating taxpayers and tax practitioners with its complexity and format. Congress wanted to eliminate the AMT in the tax bill but was unable to based on the overall tax savings specified in the bill. However, there were several changes to the AMT which will greatly soften its impact in 2018 and beyond. The AMT exemption has been increased and the point at which this exemption is phased out was greatly increased. Thus, AMT will ensnare far fewer taxpayers in 2018, but taxpayers will still need to gather all information to complete the AMT form.
So, 2018 is a transition year as taxpayers move to a new tax structure following last year’s historic tax reform bill. As with most tax bills, there are many plusses and minuses. Please contact your Sikich tax advisor for any assistance, or with any questions you have.