What the Tax Reform Bill Means for your 2018 Return!

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Last year the Tax Reform Bill was signed into law and its been called “the most sweeping changes to the tax code in 30 years!”  The law is 1,000 pages long but what most of us want to know is, “How does this affect my 2018 taxes?!?”  Don’t worry; below we’ve included the changes that will affect most tax returns this upcoming tax season! 

Child Tax Credit

Under the Tax Reform Bill the Child Tax Credit doubled from last year! It went from $1,000 to $2,000 with $1400.00 be a refundable credit. The new tax law also gives taxpayers with non-child dependents a tax break with a $500.00 credit. Another big change was the Adjusted Gross Income phase out.  Last year the income limit was$75,000 for single taxpayers and $110,000 for married couples.  That limit will now increase to $200,000 for single tax payers and $400,000 for married couples. 

Tax Filing StatusMaximum AGI for Full CreditAGI Where Credit Disappears
Single$200,000Over $240,000
Married filing jointly$400,000Over $440,000
Head of household$200,000Over $240,000
Married filing separately$200,000Over $240,000

What This Means For Taxpayers

  • Bigger refunds for lower- income families. 
  • More people will be eligible for the credit with the income limit being increased to $200,000 for singles filers and $400,000 for married couples. 
  • Allows those who have non-child dependents the opportunity to still claim a $500.00 credit, reducing tax liability for more taxpayers. 

Standard Deduction & Personal Exemptions

Taxpayers who do not itemize their deductions take the standard deduction to reduce their tax liability.  Last year it was $6,350.00 for single individuals and $9,350 for those claiming head of household. For married couples it was $12,700. For the 2018 tax year its been increased to $12,000 for single taxpayers, $18,000 for head of household and $24,000 for married couples filing jointly.  The tax bill however does suspend personal exemptions which were previously $4,050 per taxpayer, dependant, and spouse.  With the increase in the standard deduction most taxpayers will not be affected by this change.  

What does this mean for Taxpayers

With the standard deduction doubling for taxpayers, this could essentially reduce the tax bill of those who do not have enough itemized deductions.  For example, last year a couple making 90,000 taking the standard deduction of 12,700 and using personal exemption of $8,100 (which has been eliminated with the new tax bill)  would have had a taxable income of $69,200 and a tax bill of $94,000.  Under the new standard deduction their taxable income would be reduced to $66,000 and their tax bill would be $7500! This could be good for taxpayers who really don’t have enough expenses to use itemized deductions but would still like to reduce their tax bill.  

Itemized Deductions 

Itemized deductions allows taxpayers the ability to reduce their taxable income by claiming a variety of deductions and expenses instead of the standard deduction.  This previously included moving expenses, property taxes on homes and cars, state and local sales tax, charitable contributions, medical expenses, and work related expenses. If you usually claim itemized deductions than you need to be aware these changes!

  • Moving Expenses, Unreimbursed employee expenses, tax preparation fees, theft and personal casualty losses (unless federally declared disaster areas) and investment fees have all been eliminated!  You will not be able to claim any of these deductions for your 2018 taxes. 
  • In previous years you could only claim a deduction for the portion of your expenses that exceeded 10% of your adjusted gross income.  Under the new tax law the threshold to claim itemized deductions for medical expenses was reduces to 7.5 percents of a filers adjusted gross income. 
  • The State and Local Taxes Deduction (SALT) now has a limit. Before taxpayers could include state and local property taxes as itemized deductions.  You still can for 2018 but now it is capped at 10,000 of expenses.  This means that if you are a wealthy person that lives in a state with high state and local taxes you could lose out on that major tax break this upcoming tax season! 
  • Home Mortgage Interest deduction changed this year as well however it won’t affect the average taxpayer.  In prior years you could deduct interest on mortgage loans of up to $1 million.  That amount has been reduced to $750,000 for any new home loans.  Home equity loan interest deductions were eliminated (sorta)!  You can still deduct the interest of the loan up to 100,000 as long as it was used for substantial home improvements! 

What this means for the Taxpayer

The elimination and limits on some of the most common deductions along with the increase of the standard deduction will more than likely reduce the amount of taxpayers that actually itemize deductions. Whether you still choose to itemize will depend on various factors and you should consult with your tax preparer to see what method would work best for you. 

Capital Gains Tax on Home Sales 

So Uncle Sam usually lets you exclude $250,000 of capital gains on real estate if you’re single and $500,000 for married couples filing jointly if you met the following criteria:

  • The house was your primary residence. 
  • You owned and lived in the property for at least two years in the five-year period before you sold it.  
  • You haven’t excluded another hom from capital gains in the two-year period before the home sale. 

Taxpayers can still exclude gains up to $250,000 ($500,000 married) however they have to live at the residence longer.  Now people who sell their primary residence would have to have lived their five out of the eight years before the sale.  

What this means for Taxpayers

Unfortunately the old tricks that used to work to avoid paying capital gains taxes on home sales will be a bit more difficult for taxpayers.  This can of course in crease their tax bill.  There are however other ways you can avoid or reduce the capital gains tax so make sure you speak with a tax specialist or financial advisor.  

The Bottom Line 

The new tax bill  did come with some disappointing changes. The elimination of miscellaneous deductions and personal exemptions were a major blow to taxpayers that used these to reduce their taxable income.  However, one major to the tax bill was the increase in the child tax credit and home many taxpayers are now eligible.  Also, more of the credit is now refundable which is a plus for taxpayers.  Every taxpayer’s situation will be different so if you have any questions on how this will affect your specific situation don’t hesitate to reach out to one of our tax professionals.  

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