As the New Year rolls around, it's always a sure bet that there will be changes to current tax law and 2018 is no different. From health savings accounts to tax rate schedules and standard deductions, here's a checklist of tax changes to help you plan the year ahead.
For 2018, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion. Many others have been revised or eliminated due to the the Tax Cuts and Jobs Act of 2017 (TCJA).
While the tax rate structure, which now ranges from 10 to 37 percent, remains similar to 2017 in that there are seven tax brackets, the tax-bracket thresholds increase significantly for each filing status. Standard deductions also rise significantly; however, personal exemptions have been eliminated through tax year 2025.
Standard Deduction
In 2018, the standard deduction increases to $12,000 for individuals (up from $6,350 in 2017) and to $24,000 for married couples (up from $12,700 in 2017).
Alternative Minimum Tax (AMT)
In 2018, AMT exemption amounts increase to $70,300 for individuals (up from $54,300 in 2017) and $109,400 for married couples filing jointly (up from $84,500 in 2017). Also, the phaseout threshold increases to $500,000 ($1 million for married filing jointly). Both the exemption and threshold amounts are indexed for inflation.
Adoption Credit
In 2018, a non-refundable (only those individuals with tax liability will benefit) credit of up to $13,840 is available for qualified adoption expenses for each eligible child.
Earned Income Tax Credit
For tax year 2018, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $6,444, up from $6,318 in 2017. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credits
For tax years 2018 through 2025, the child tax credit increases to $2,000 per child, up from $1,000 in 2017. The refundable portion of the credit increases from $1,000 to $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. Under TCJA, a $500 nonrefundable credit is also available for dependents who do not qualify for the child tax credit (e.g., dependents age 17 and older).
Child and Dependent Care Credit
The Child and Dependent Care Credit also remains under tax reform. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2018.
For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Penalty for not Maintaining Minimum Essential Health Coverage
Under the TCJA, the penalty for not maintaining minimum essential health coverage has been eliminated but only for months beginning after December 31, 2018.
AGI Limit for Deductible Medical Expenses
In 2018, the deduction threshold for deductible medical expenses is temporarily reduced to 7.5% percent of adjusted gross income (AGI). This is retroactive to the tax year starting January 1, 2017 and ends on December 31, 2018.
Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations.
- For those age 40 or younger at the end of 2018, the limitation is $420.
- Persons more than 40 but not more than 50 can deduct $780.
- Those more than 50 but not more than 60 can deduct $1,530.
- Individuals more than 60 but not more than 70 can deduct $4,160.
- The maximum deduction is $5,200 and applies to anyone more than 70 years of age.
Foreign Earned Income Exclusion
For 2018, the foreign earned income exclusion amount is $104,100, up from $102,100 in 2017.
Long-Term Capital Gains and Dividends
In 2018 tax rates on capital gains and dividends remain the same as 2017 rates (0%, 15%, and a top rate of 20%); however threshold amounts are different in that they don't correspond to new tax bracket structure as they did in the past.
- For taxpayers in the lower tax brackets (10 and 12 percent), the rate remains 0 percent; however, the threshold amounts are $38,600 for individuals and $77,200 for married filing jointly.
- For taxpayers in the four middle tax brackets, 22, 24, 32, and 35 percent, the rate is 15 percent.
- For an individual taxpayer in the highest tax bracket, 37 percent, whose income is at or above $425,800 ($479,000 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.
Estate and Gift Taxes
For an estate of any decedent during calendar year 2018, the basic exclusion amount is $11,200,000, indexed for inflation (up from $5,490,000 in 2017). The maximum tax rate remains at 40 percent. The annual exclusion for gifts increases to $15,000
Lifetime Learning Credits
The Lifetime Learning Credit remains at $2,000 per return; however, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year 2017.
Interest on Educational Loans
In 2018 (as in 2017), the $2,500 maximum deduction for interest paid on student loans is no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers with modified AGI of more than $65,000 ($135,000 joint filers).
Retirement Contribution Limits
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan increases to $18,500. Contribution limits for SIMPLE plans remain at $12,500. The maximum compensation used to determine contributions increases to $275,000 (up from $270,000 in 2018).
While this checklist outlines important tax changes for 2018, additional changes in tax law are more than likely to arise during the year ahead. Hiring a tax professional will save you time and it can save you money as well if your tax preparer finds a significant deduction or credit you might have missed.
Kimberly White Accounting, LLC provides outstanding service to their clients because of their dedication to the principles of professionalism, responsiveness, andquality. To schedule an appointment, please call (303) 791-5114 or email info@kimberlywhiteaccounting.com.
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Kimberly White is an accountant and the owner of Kimberly White Accounting, LLC. Kimberly received a bachelor's degree in Accounting from Wichita State University, a Master's degree in Healthcare Administration from University of Kansas, and was an auditor at Price Waterhouse.
She has more than 20 years of experience in tax preparation and planning, accounting services, payroll, and bookkeeping. She is a certified QuickBooks Pro Adviser.
