Year-End Wrap Up. Highlights of the 2018 Income Tax Year.

On December 22, 2017, the Tax Cuts and Jobs Act (TCJA) was signed into law and threw everyone for a loop with major changes. The following is a year-end review of the major changes we are facing this year. 

Tax Rates

The TCJA reduced individual tax rates to 10%, 12%, 22%, 24%, 32%, 35% and 37% for tax years 2018– 2025. Kiddie tax rates for unearned income purposes were changed from the parents’ respective tax rates to the trust tax rates of 10%, 24%, 35% and 37% for 2018–2025. This simplified the kiddie tax, allowing the child to file his or her own return even if the parents have not filed theirs. However, the child’s maximum tax rate is now 37%, which starts at $12,500. 

Unchanged Tax Rates

The capital gains and qualified dividends rates will remain unchanged at 0%, 15% and 20%, with an additional Medicare rate of 3.8% for taxpayers who meet the threshold requirements. Maximum unrecapatured §1250 gain due to depreciation remains at 25%, and collectible and antique capital gain remains at 28%.

Personal Exemption and Standard Deduction 

The TCJA eliminated the personal exemption. Standard deductions essentially doubled by encompassing the old standard deduction and adding the personal exemption, allowing for a larger standard deduction for each filing status. 

Child Tax Credit and Other Dependent Credit 

The child tax credit has been expanded and increased. The credit was expanded to include dependents age 17 or older and was doubled for qualifying dependents under age 17. The child tax credit increased to $2,000 per qualifying child and the other dependent credit of $500 was added to allow for a credit for older children that taxpayers claim as dependents on their return. Along with the increase and expansion of the credit, the TCJA also increased the phaseout limits for the child tax credit from $75,000 for Single and HOH taxpayers to $200,000 and from $110,000 to $400,000 for MFJ taxpayers. The refundable child tax credit increases from $1,000 to $1,400 for 2018.

Itemized Deductions 

The suspension of itemized deductions subject to the 2% AGI limitation for 2018–2025 will have a huge impact on multiple taxpayers, especially employees who have filed Form 2106 in the past to claim a deduction for unreimbursed employee expenses. 

Medical Expenses 

The medical expenses floor reduces to 7.5% of AGI for 2018, but will revert back to 10% of AGI for 2019 and later years. 

State and Local Income Tax Deductions

The aggregate deduction for state and local income tax or sales tax, real estate taxes, personal property taxes, war profits, and excess profits taxes is limited to a total of $10,000.

Mortgage Interest

The TCJA reduced the allowable ceiling for qualified mortgage interest on a taxpayer’s residence from $1,000,000 of acquisition indebtedness to $750,000, unless the mortgage was incurred on or before Dec. 15, 2017. Mortgages obtained prior to this date are considered grandfathered debt under the $1,000,0000 indebtedness limit. The deduction for home equity debt is also suspended for tax years 2018–2025. Because of this suspension, the only way for home equity indebtedness to be qualified debt is for it to meet the definition of qualified mortgage debt, be secured by the home, be used to improve the property and be included in the acquisition debt limitations.

Charitable Contribution Deduction

The charitable contribution deductions remain mostly the same for 2018, except that the AGI threshold limitations for cash contributions to public charities increased from 50% to 60%. Also, TCJA eliminates a charitable deduction for payments made to colleges or universities for the right to purchase tickets or seats at athletic events.

Casualty and Theft Loss

Under the TCJA, personal casualty losses are limited to casualty losses in a federally declared disaster area. Personal theft losses are no longer deductible. 

Gambling Losses and Expenses 

Gambling losses remain deductible on the Schedule A, Form 1040. In addition, the new law allows other expenses related to gambling (e.g., travel) to be deductible to the extent of gambling winnings. 

Moving Expenses 

The moving expense deduction has been eliminated for all taxpayers except active members of the Armed Forces moving due to a change in military orders. The TCJA suspends the exclusion from gross income for any other taxpayers receiving reimbursement for what would have been otherwise qualified moving expenses. 

Alimony

Congress has eliminated the deduction for alimony paid, thereby, making alimony received nontaxable. This will be effective for any divorce or separation instrument executed after Dec. 31, 2018. This does not apply to previously agreed upon prenuptial agreements. This elimination will also apply to pre-2019 divorce decrees that are amended after Dec. 31, 2018, if the new agreement expressly provides that TCJA rules apply. 

AMT 

Exemption amounts and phase-out limitations increase for tax years 2018–2025. 

§529 Plan Distributions 

The new tax law allows a taxpayer to receive a distribution up to $10,000 each year from a §529 plan to pay for education costs for tuition and related fees paid to a public, private or religious elementary or secondary educational institution. This distribution allowance will not sunset in tax year 2025. This new law also allows for the taxpayer to roll over funds from the §529 plan to an ABLE account without penalties. This rollover must be made to an ABLE account that is owned by the designated beneficiary of the §529 plan, or to a member of the designated beneficiary’s family. 

Discharge Student Loan Debt 

For 2018–2025, student loan debt that is discharged due to total and permanent disability or death of a student is excludable from income.

Roth IRA Recharacterization 

The TCJA repealed the law that allowed a taxpayer to recharacterize a Roth conversion back to a traditional IRA. The new law is effective Jan. 1, 2018, going forward. However, a taxpayer can still recharacterize Roth contributions to a traditional IRA as long as the recharacterization takes place before the due date of the taxpayer’s income tax return. 

Section 1031 Exchange

Under the previous law, a taxpayer could defer gain on the exchange of any like-kind property including tangible personal property such as a business use vehicle. However, under the TCJA, a taxpayer can only defer the gain under §1031 for the exchange of real property. The exchange of a vehicle is now reportable as a sale of the old property and a purchase of the new property on Form 4562, Depreciation and Amortization (Including Information on Listed Property). 

Estate Tax Exclusion 

Effective Jan. 1, 2018, the exclusion for decedents is $11,180,000. The FMV date of death basis rules remain in effect. 

§199A 

The TCJA created a new deduction for individual taxpayers who have qualified business income (QBI). The deduction is generally equivalent to 20% of the taxpayer’s QBI that is from either a partnership, S corporation, sole proprietorship or farm. This deduction can also be claimed from aggregate dividends from a REIT or qualified PTP income. However, this income is subject to limitations and phaseouts.

In general, the §199A deduction is the lesser of (1) the combined QBI amount or (2) an amount equal to 20% of the excess (if any) of taxable income of the taxpayer for the tax year over the net capital gain of the taxpayer for the tax year.

Except as provided below, the deduction can't exceed the greater of:

1. 50% of the W-2 wages with respect to the qualified trade or business (W-2 wage limit), or 

2. The sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property. 

The above limit does not apply for taxpayers with taxable income below the threshold amount ($315,000 for married individuals filing jointly, $157,500 for other individuals, indexed for inflation after 2018). 

Taxpayers under the income limitations are allowed the full 20% deduction. A partial deduction is allowed for taxpayers falling within the phase-out range. However, the deduction is eliminated for those taxpayers exceeding the top of the phase-out range. These phase-out ranges are $100,000 ($315,000– 415,000) for MFJ and $50,000 ($157,500–207,500) for all others. 

Health Insurance Penalty 

The Affordable Care Act enacted an individual mandate penalty for taxpayers who did not maintain minimal essential health coverage during the tax year. This penalty was imposed for tax years 2013– 2018. The TCJA, reduced the amount of the individual responsibility payment to $0 for months beginning after Dec. 31, 2018. 

Bill Hampton, CEO
Hampton Tax and Financial Services, LLC
Tel: 404-482-3170
Fax: 877-323-3932

Website: www.HamptonFinancialLLC.com

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