2018 Tax Law Changes

The House and Senate have passed a tax reform bill that could dramatically change what you have anticipated for your tax refund or bill. These new rules may benefit you significantly.

On the other hand, the new 2018 tax law changes could dramatically reduce your tax refund. This will depend on your assets, investments, children, and any businesses that you may own.

I will outline the key changes for you in this article. You can also get an estimate of how the 2018 tax changes will impact you with the Wall Street Journal tax plan calculator.

The 2018 Tax Law Changes are as follows:

The tax brackets have been adjusted for individual filers and income tax rates have been reduced

The individual tax brackets for 2018 have been reduced and income tax rates have been lowered. These adjustments are set to be in place until December 31, 2025, unless Congress makes any new adjustments to the tax code.

I have included the new tax table with the tax brackets and corresponding taxable income reductions.

Tax brackets and taxable income table for 2018

Currently, corporate tax brackets are at 35%, they will be lowered to 21%. These are permanent changes and are not set to expire in 2026.

Standard Deduction Increased

The standard deduction and personal exemption have been combined forming a higher standard tax deduction.

Currently, the standard deduction is $6350/individual and married filing separately, $9350/head of household, and $12,700/married filing jointly.

The 2018 tax law changes are $12,000/individual and married filing separately, $18,000/head of household, and $24,000/married filing jointly.

standard deduction of 2018

Child Tax Credit Increased

The child tax credit has been increased from $1000 to $2000, also it increases the amount of the credit that is refundable to $1400. For children over 17 years of age, you will receive $500.

The child tax credit of 2018 phase out at $400,000/married filing joint, $200,000/individual. This is a pretty big increase from the previous limits of $110,000/married filing joint and $75,000/individual.

New Dependent Tax Credit

There is a new dependent tax credit for 2018. Previously, there was no dollar amount/credit assigned to non-child dependents.

The amount that the credit is $500 and applies to non-children, elderly parents, and adult children with disabilities.

Senior Citizen Standard Deduction Increased

The standard deduction for senior citizens (over age 65) has been increased.

Currently, the current deduction for is $1,500/individuals and $2,500/married filing jointly. The 2018 tax law changes are $1,600/individuals and $2,600/married filing jointly.

For the senior citizen’s deduction for married filing joint both spouses need to be over the age of 65.

These new terms will expire if not renewed or adjusted for taxable years after December 31, 2025, and 2017 tax regulations would resume.

With the higher standard deductions, it will not be beneficial to many families to itemize deductions. This will depend on your specific household financial situation.

In addition to the above changes, there are many adjustments that have been made to 2017, tax credits and deductions. I have detailed these items below.

Mortgage Interest

The mortgage interest deduction for 2018 has been decreased from $1 million/primary, second homes, and some home equity debt and limited to $750,000/primary and secondary homes.

This provision applies for taxable years after December 31, 2017, and expires after December 31, 2025,.

State and Local Tax Deduction (SALT)

The state and local tax deduction has been capped at $10,000/sales and state and local property taxes or sales and state and local income taxes.

Medical Expense Deduction

The medical expense deduction for 2018 has been adjusted. Previously, medical expenses that were greater than 10% of the AGI (adjusted gross income) were deductible.

This threshold has been lowered to 7.5% for 2018. This deduction can also be claimed for tax year 2017,.

Adoption expense tax credit

The adoption expense tax credit for 2018 remains unchanged with qualifying expenses up to $13,570.

Retirement Savings Incentives

Retirement savings incentives for 2018 remain the same. Since the current 2017, retirement incentives and contribution limits are considered favorable the new rules do not call for any changes.

Health savings accounts have also rules have also remained intact.

Roth IRA recharacterization options are over for 2018; however, 2017, recharacterizations will still be permitted.

Temporary Increase in Federal Estate Tax Exemption

The federal estate tax exemption of 2018 will temporarily be increased to $11 million/per person ($22 million/couple). The law change will revert to the current law after 2025,.

Changes to AMT (Alternative Minimum Tax)

The AMT will raise the minimum income level at which the AMT will apply. The Alternative Minimum Tax of 2018 will increase from $50,600 (AMT of 2017,) to $70,300/individuals and from $78,750 (AMT of 2017,) to $109,400/married filing joint.

The Alternative Minimum Tax was intended to stop those with high incomes from avoiding paying their income taxes via stacking credits and deductions.

New Corporate Tax Rate and Pass-Through Tax Rate

The corporate tax rate for 2018 will be reduced to 21% and this tax law change is not set to expire as the others are in 2026. This change is permanent.

Sole proprietorships, pass-through businesses, S-corporations, and partnerships will be taxed at individual rates and will be able to deduct 20% of income.

This deduction will only be available to married filing jointly with income below $315,000 to avoid those with high incomes taking advantage.

Those with higher incomes will have more complicated rules, however, there are specific businesses that may still have eligibility for a limited deduction.

529 Plans Become More Flexible

The 529 plans of 2018 allow up to $10,000/year to be used for expenses for grades K-12, college, and post-graduate studies. Certain circumstances will allow for a temporary increase in contributions limits for ABLE accounts.

February Paycheck Income Tax Withholding Decreases

Due to the 2018 tax reform changes, your employers will be withholding less money for income taxes from your paychecks no later than February 15, 2018. This law was released by the Department of Treasury and the IRS on January 11, 2018, click here for more detailed information.

Well, that sums up the 2018 tax law changes for the tax brackets, rates, deductions and credits.
If you have a tax agency prepare your taxes for you they will have all the updated information, however, it is always a good idea to have this information for better financial planning.

If you are like me and prepare your own taxes, this information is imperative to have. I use Turbotax which has a live CPA and tax professionals to assist with any questions that may arise. If you want more information on Turbotax you can check out my Turbotax review by clicking here.

If you have any further questions or comments, feel free to leave them below and I will get back to you right away.

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