Federal Tax Reform - Changes for 2018

The biggest Federal Tax Reform law in 30 years has been enacted. Congress may enact still additional changes in January 2019 that will be retroactive to 2018. Your 2018 Federal tax return will look very different from previous years. Here are a few of the biggest changes.

Tax Form Changes

Gone are Forms 1040EX and 1040A, and the new Form 1040 is up to eight pages long plus all of the former schedules and forms (forget about simplification).l

Tax Rate Changes

Both individual and corporate rates have changed. There are now seven individual rates (forget about simplification), with the maximum being 37%, and the corporate rate is now 21%. The rate change could benefit you - or in some cases, hurt you.

Standard Deduction Increases

2018 Standard Deduction is double the 2017 amount. However, personal exemption deductions are eliminated. So this may help you - or hurt you.

Increased Child Tax Credit and the new Dependent Credit

The credit is increased for each child to $2,000 (of which up to $1,400 is refundable for each child) and each non-child dependent can now receive a new credit of $500. But you will have no exemption credit or deduction for yourself, your spouse, or your dependents. The phaseout thresholds for these credits are increased. married taxpayers filing a joint return can claim the full credit if their adjusted gross income (AGI) is $400,000 or less ($200,000) for all others). The credits are fully phased out for married taxpayers filing a joint return when their AGI reaches $440,000 ($240,000) for all others). Many more taxpayers will be able to claim these credits in 2018 and beyond.

Federal Deductions Eliminated

The items below are no longer deductible on your Federal return. However, for California and many other states, deductions previously allowed are still available. As a result, there will be an advantage for many people to claim the standard deduction on their Federal return and itemize on their state return.

  • State income tax plus property taxes above $10,000 per year in total
  • Moving expenses when you change employment (with an exception for certain military)
  • Employee business expenses (such as mileage, travel, entertainment, home office expenses, union dues, etc.) tax preparation fees, and investment fees, among others
  • Mortgage interest beyond interest on $750,000 of debt, if you purchase a new home
  • Mortgage interest paid on equity debt (this is no longer deductible for anyone)

Some new benefits for individuals

These new benefits include:

  • The 2018 medical expense income threshold decreased from 10% of AGI to 7.5% of AGI
  • The Alternative Minimum Tax (AMT) threshold is increased, so fewer middle-income taxpayers will be subject to AMT
  • The estate tax exclusion has been increased to over $11 million (and is annually adjusted for inflation).

Small Business Benefit

Beginning in 2018, there will be up to a 20% deduction from net business income for most sole proprietorships, LLCs, partnerships, and S corporations. The rules are complicated.

The above are the most common changes. At your tax interview this year I will discuss changes that affect you, and where possible, suggest ways to use the new tax law to your advantage.