Individual Tax Rates
The legislation retains seven individual income tax brackets, but reduces them to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. In 2026, these brackets will expire and previous tax rates will be restored. Those rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The 2018 rates and income brackets are listed below.
|Rate||Single Filers||Head of Household||Joint Filers|
Alternative Minimum Tax (AMT)
AMT is a minimum tax on your taxable income amount above a designated exemption. The AMT is retained for individuals, but the exemption amount and phaseout thresholds are increased so fewer people will be affected. The exemption amount starts at $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption will phase out at $1 million for joint filers and $500,000 for other taxpayers. Thresholds will be adjusted for inflation, and a higher AMT exemption will apply to income from 2018 to 2025. To find out whether you owe AMT, calculate your income tax and your AMT, then pay the higher total.
The standard deduction increases to $24,000 for joint filers, $18,000 for heads of households, and $12,000 for single filers. These 2018 deduction amounts are nearly double the 2017 amounts. Because taxpayers can claim the standard deduction or itemized deductions (whichever is greater), be sure to compare the two methods closely. You could benefit from a higher standard deduction given the changes made to itemized deductions.
It is still important to track medical expenses, mortgage interest, property and state income, sales tax payments, and charitable contributions made in 2018 and after. Consider increasing charitable contributions or accelerating contributions on alternating years to increase itemized deductions.
Medical Expense Deduction
All taxpayers, regardless of age, can deduct medical expenses for 2017 and 2018 if the expenses exceed 7.5% of adjusted gross income (AGI). However, the AGI threshold returns to 10% of AGI in 2019.
State and Local Tax Deduction
Individuals cannot deduct more than $10,000 of state and local income taxes, state and local property taxes, and sales tax. Any combination of these taxes is limited to the $10,000 deduction. Review your tax situation to see if it makes sense to pay your state and local estimated income taxes or property taxes in December every year.
Mortgage Interest Deduction
Taxpayers are limited to a $75,000 interest deduction on mortgage debt incurred after December 15, 2017. The $1 million limitation remains for older debt. Interest on your primary residence and one secondary residence is deductible. Interest on home equity debt is no longer deductible in 2018, regardless of when the debt was incurred. However, the mortgage interest incurred to remodel a primary residence is deductible. You can refinance your mortgage to remodel your primary residence instead of using a home equity loan.
Unreimbursed Employee Business Expenses
The Tax Cuts and Jobs Act eliminates the deduction for miscellaneous itemized deductions through 2025. Deductions for costs related to the production or collection of income, such as appraisal fees, investment fees, and safety deposit box rent are now nondeductible, if subject to the 2% floor of AGI. Expenses related to employment, such as uniforms, professional society dues, computers used for work, and job-hunting expenses are also nondeductible.
Employees who incur significant unreimbursed business expenses may want to ask their employer about adjusting their compensation or establish an accountable expense reimbursement plan that would allow the employer to reimburse the employee tax-free. Under this plan, the employer is entitled to a deduction against their business income.
Personal exemptions are eliminated in 2018 and subsequent years. In 2017, the personal exemption was $4,050 per person.
Child and Dependent Credits
The child tax credit increases to $2,000 per child from $1,000. Children must be 17 years old or younger to qualify. The credit is only available from 2018 to 2025. Up to $1,400 of the credit is refundable, so recipients may benefit even if they don't owe taxes. The AGI phaseout threshold for this credit increases to $400,000 for married filing joint and $200,000 for all other filers. Previously, this threshold was $110,000.
The above-the-line deduction for alimony paid for divorces or separations executed after December 31, 2018 is repealed. After this date, alimony payments will not be included in the recipient's income and the payments cannot be deducted by the payor. If you are currently contemplating divorce or separation, consider carefully reviewing the new law and its effects to determine the economic impacts on your tax situation and timing of any agreements.
Lowering Taxable Income
To lower your taxable income, consider maximizing all pre-tax contribution opportunities such as your 401(k) and maximizing deductible IRA contributions.
These are just 10 items included in the Tax Cuts and Jobs Acts that will impact your future individual income tax returns. Be sure to plan ahead and fully understand how these changes and other tax reform changes will affect you so you can maximize your tax savings.
To learn more, or if you have any questions, please contact your Beene Garter professional.