Overview of the Tax Cuts and Jobs Act
Major tax reform
that affects both individuals and businesses was enacted in December 2017. It’s
commonly referred to as the Tax Cuts and Jobs Act, TCJA or tax reform. The IRS
estimates that they will create or revise more than 400 taxpayer forms,
instructions and publications for the filing season starting in 2019. It’s more
than double the number of forms that would be created or revised in a typical
New Form 1040
Form 1040 has been
redesigned for tax year 2018. The revised form consolidates Forms 1040, 1040A
and 1040-EZ into one form that all individual taxpayers will use to file their
2018 federal income tax return.
The new form uses a
“building block” approach that can be supplemented with additional schedules as
needed. Taxpayers with straightforward tax situations will only need to file
the Form 1040 with no additional schedules.
Changes in Tax Rates
For 2018, most tax rates have been reduced. The 2018 tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
In addition to lowering the tax rates, some of the changes in the law that affect you and your family include increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, and limiting or discontinuing certain deductions. Most of the changes in this legislation take effect in 2018 for federal tax returns filed in 2019.
Capital Gain Tax Rates
In 2018 the capital gains tax rates are either 0%, 15% or 20% for most assets held for more than a year. Capital gains tax rates on most assets held for less than a year correspond to ordinary income tax brackets (10%, 12%, 22%, 24%, 32%, 35% or 37%).
The long term capital rates vary by filing status and income level:
· 0% rate – Single (0-$38,600); Married Filing Joint (0-$77,200); Head of Household (0-$51,700); Married Filing Separately (0-$38,600)
· 15% rate – Single ($38,601-$425,800); Married Filing Joint ($77,201-$479,000); Head of Household ($51,701-$452,400); Married Filing Separately ($38,601-$239,500)
· 20% rate – Single ($425,801+); Married Filing Joint ($479,001+); Head of Household ($452,401+); Married Filing Separately ($239,501+)
Changes to Standard Deduction
The standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. The standard deduction reduces the income subject to tax. The Tax Cuts and Jobs Act nearly doubled standard deductions. When you take the standard deduction, you can’t itemize deductions for mortgage interest, state taxes and charitable deductions on Schedule A, Itemized Deductions.
Starting in 2018, the standard deduction for each filing status is:
Single - $12,000 (up from $6,350 in 2017)
Married filing jointly/Qualifying widow(er) - $24,000 (up from $12,700 in 2017)
Married filing separately - 12,000 (up from $6,350 in 2017)
Head of household - $18,000 (up from $9,350 in 2017)
The amounts are higher if you or your spouse are blind or over age 65.
Changes to Itemized Deductions
In addition to nearly doubling standard deductions, the Tax Cuts and Jobs Act changed several itemized deductions that can be claimed on Schedule A, Itemized Deductions:
Deduction for medical and dental expenses modified. You can deduct certain unreimbursed medical expenses that exceed 7.5% of your 2018 adjusted gross income. Before this law change, unreimbursed medical expenses had to exceed 10% of adjusted gross income for most taxpayers in order to be deductible. If you plan to itemize for tax year 2019 your unreimbursed medical and dental expenses will have to exceed 10% of your 2019 adjusted gross income in order to be deductible.
Deduction for state and local income, sales and property taxes modified. Your total deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if Married Filing Separate). Any state and local taxes you paid above this amount cannot be deducted.
Deduction for home mortgage and home equity interest modified. Your deduction for mortgage interest is limited to interest you paid on a loan secured by your main home or second home that you used to buy, build, or substantially improve your main home or second home.
New dollar limit on total qualified residence loan balance. The date you took out your mortgage or home equity loan may also impact the amount of interest you can deduct. If your loan was originated or treated as originating on or before Dec. 15, 2017, you may deduct interest on up to $1,000,000 ($500,000 if you are married filing separately) in qualifying debt. If your loan originated after that date, you may only deduct interest on up to $750,000 ($375,000 if you are married filing separately) in qualifying debt. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.
Deduction Limit for charitable contributions modified. The limit on charitable contributions of cash has increased from 50 percent to 60 percent of your adjusted gross income.
Deduction for casualty and theft losses modified. Net personal casualty and theft losses are deductible only to the extent they’re attributable to a federally declared disaster. Claims must include the FEMA code assigned to the disaster. The loss must still exceed $100 per casualty and the net total loss must exceed 10 percent of your AGI. In addition, you can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which you incurred the disaster loss.
The previous deduction for job-related expenses or other miscellaneous itemized deductions that exceeded 2 percent of your adjusted gross income is suspended. This includes unreimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel, as well as any deductions you may have previously been able to claim for tax preparation fees and investment expenses, including investment management fees, safe deposit box fees and investment expenses from pass-through entities. The business standard mileage rate listed in Notice 2018-03 cannot be used to claim an itemized deduction for unreimbursed employee travel expenses during the suspension.
Deduction and Exclusion for moving expenses suspended. The deduction for moving expenses is suspended. During the suspension, no deduction is allowed for use of an automobile as part of a move. This suspension does not apply to members of the U.S. Armed Forces on active duty who move pursuant to a military order related to a permanent change of station. Also, employers will include moving expense reimbursements as taxable income in the employees’ wages because the new law suspends the former exclusion from income for qualified moving expense reimbursements from an employer. This suspension does not apply to members of the U.S. Armed Forces on active duty who move pursuant to a military order related to a permanent change of station as long as the expenses would qualify as a deduction if the government didn’t reimburse the expense. This means that unless you are a member of the U.S. military on active duty, you cannot deduct moving expenses and amounts reimbursed by an employer will be taxable income.
Alternative minimum tax (AMT) exemption amount increased
The AMT exemption amount is increased to $70,300 ($109,400 if married filing jointly or qualifying widow(er); $54,700 if married filing separately). The income level at which the AMT exemption begins to phase out has increased to $500,000 or $1,000,000 if married filing jointly.
For 2018, the mileage reimbursement rates are:
- 54.5 cents per mile for business miles driven
- 18 cents per mile driven for medical or moving purposes
- 14 cents per mile driven in service of charitable organizations
For 2019, the mileage reimbursement rates are:
- 58 cents per mile driven for business use, up 3.5 cents from the 2018 rate
- 20 cents per mile driven for medical or moving purposes, up 2 cents from the 2018 rate
- 14 cents per mile driven in service of charitable organizations
Consumer Alerts on Tax Scams
Note that the IRS will never:
- Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail you a bill if you owe any taxes.
- Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
- Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
- Ask for credit or debit card numbers over the phone.