The Tax Cut and Jobs Act of 2017 imposed some major and sweeping changes to the US tax code, many of which remain in the interpretation stage and have not been converted into Treasury regulations. This article covers some tax law changes that will impact most taxpayers. It will also dispel some myths regarding the new tax law and provide some basic tax-planning ideas.

2018 Tax Changes for Individuals

Here are some of the major changes that may impact your return for 2018.

The Magical Postcard Myth: A politically-motivated myth claims that the new 1040 “postcard” simplifies tax preparation and tax filing. NOT TRUE! This so-called simplification has resulted in a plethora of new forms and schedules that require completion before the completion of this super-simple postcard. We’re nearing the end of 2018, and many of these schedules & their instructions are still in their draft-infancy. What’s will be the result of this simplification? Expect a 20% increase in the amount of time DIY taxpayers and professionals spend properly completing all but the most basic returns for 2018.

Refund Disappointment: The new Federal withholding tables were designed to provide larger paychecks throughout the year by reducing withholding. Unfortunately, they were not designed to increase refunds at year-end. Those who did not heed warnings to take 2017-2018 tax-comparisons with a grain of salt due to withholding changes may be very surprised when they receive a very small (if any) refund. Why? The new withholding tables provided anticipated refunds in bits and pieces throughout the year in the form of larger paychecks.

If you’re disappointed by your 2018 refund (or tax due), we suggest completing a new W-4 reflecting “single and zero” withholding.

Tax Rates Reduced: The TCJA reduced tax rates across the board and also reduced the marriage penalty that increases the taxes paid by married couples versus single taxpayer with the same income.

Personal Exemptions Gone: Starting in 2018 there will be no such thing as a personal exemption, the $4,000 (or so) deduction you receive for yourself, your spouse, and your dependents. Although you will no longer receive a deduction for yourselves and your dependents the dependency rules remain when calculating many credits and other tax items.

Standard Deduction Increased: The TCJA increased the standard deduction to $12,000 for those filing as Single or Married Filing Separately, $24,000 for those Married Filing Jointly and $18,000 for those filing as Head of Household. There is a $1,300 for the elderly and blind who are married & $1,600 for those who are unmarried.

Itemized Deductions: Due to the increase in the standard deduction, fewer taxpayers will be itemizing deductions on Schedule A. Unfortunately, however, we will still need to your information regarding medical expenses, taxes you paid, mortgage interest, charitable contributions, and other deductions to apply the new rules and complete many state tax returns.

The TCJA also made some drastic changes to the rules governing itemized deduction. Here are a few:

  • Mortgage Interest Curtailed: A major change has occurred on home equity lines and 2nd mortgages, most of which are no longer deductible. To maximize and properly calculate this deduction, we will need to know a lot more about these loans than we needed in the past.
  • State & Local Tax Deduction Limited: The following taxes are now limited to a total deduction of $10,000 in a given tax year: State Income Tax, Local Income Tax, Real Estate Property Tax, and Personal Property Tax. Certain taxes paid to a foreign country and the Generation Skipping Tax, however, do not appear to be included in the $10,000 limit.
  • Job-Related Deductions Gone: Employee work-related business expenses are no longer deductible on the Federal return, but we may still need the information for your state return, and if you incur a lot of these types of expenses, you need to discuss the use of an accountable plan with your employer.

Other Changes

Child Tax Credit Increased: The child tax credit doubled to $2,000 per child for qualifying children and taxpayers. It also phases out at a much higher income range meaning that a lot more taxpayers will receive the credit.

Energy Credit Changes: Most home-related energy efficiency credits are now expired, but an incredible 30% Federal credit still exists for solar, wind and geothermal costs; and a $7,500 Federal credit for buying a fully electric car (not a hybrid) still applies through the end of 2018. Note: The electric car credit is limited based on the number of vehicles sold by the manufacturer.

Health Insurance Penalty Still in Effect: Although there has been much fanfare in certain circles regarding the repeal of the ACA Health Insurance Penalty, the repeal does not take effect until 2019. Hence, you were still required to maintain health insurance for every member of your family for 2018 or face a potential penalty.

2018 and Future Tax Planning Ideas

Max Your 401K: Every year we are told “I pay too much in taxes” or “I want some of the tax loopholes that rich people get.” We can answer both statements with one answer. Rich people get no more tax deductions or “loopholes” than anyone else. The loopholes they use are available to everyone. And the most impactful loophole they utilize is maxing their 401K contribution when offered by their employer. 401K-maxing is by far the most effective (and overlooked) tax-cutting tool available to the middle class. And, when your employer has a match, the match is a tax-free, financial planning bonus!

If your employer offers a 401K and you are not putting the maximum deferral in it, there is no reason to even think about other tax planning ideas. Budget the deduction and max it!

Bunch Charitable Contributions: It will be more difficult to itemize deduction due to the increase in the standard deduction. Therefore, a tax “bunching” strategy is mandatory if you want to reduce your tax burden. The “charity bunching strategy” is simple – save the money you want to contribute in one year and double those contributions in the next.

For Example, let’s say you’re married and contribute $10,000 each year to charity. Your other itemized deductions (mortgage interest & state & local taxes) average $9,000 per year. In year one, your total itemized deductions would only be $19,000, making it more beneficial to take the $24,000 standard deduction. BUT, if you save that $10,000 in year one and double it to $20,000 in year two, your itemized deductions will be $29,000 in year two. That’s an additional $5,000 in deductions! If you’re in the 20% tax bracket, you just saved $1,000 in tax!
The same strategy can also apply to elective medical expenses and, in certain instances, property tax.

Check the Fringes: Take a look at your employee handbook to see what fringe benefits may be available. Clients are often surprised at the available benefits and the fact that many of these benefits reduce their tax bill!

Make Charitable Contributions Directly From your IRA: If you’re retired, over age 70 ½, and have an IRA, consider making direct contributions to your church or charity from the IRA. This simple trick makes the distribution non-taxable to you can save a lot of federal and state tax, especially if don’t itemize deductions and are required to take required minimum distributions. Contact your IRA trustee for more information on the process.

Keep Learning: We hope this article has helped you better understand some of the 2018 tax changes for individuals. Our course library has a variety of courses designed to help you navigate the tax laws and minimize your tax liability. We hope you’ll check it out.

Need More Help? Brett Hersh is an instructor and author for Overnight Accountant. He is also a tax professional who specializes in helping real estate agents, brokers, professionals, investors, and businesses in related industries. If you would like to schedule a consult with Brett or inquire about his services, please feel free to email him. Brett would like to thank Taxspeaker.com for providing some of the information shared in this article.

All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.

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