Your 2018 return won’t look anything like what you’re used to. The tax form is new and changes from the Tax Cuts and Jobs Act will substantially change what you can and cannot write off.
1. New Tax Form
When you file your 2018 return, it’s going to be on a newly designed Form 1040 (not quite the size of a postcard but pretty close). There’s no longer any Form 1040A or 1040-EZ. The new 1040 used by all filers is a short two-pager and is mostly for recapping income, deductions, and credits. These items are reported on new schedules 1 through 6.
But don’t despair about having a new form and schedules. Most taxpayers (about 80%) use software to file electronically (known as E-filing) or paid preparers to complete their returns. If this describes you, all you need is to provide the correct information; you don’t have to worry where it goes on the form or schedules.
2. Lower Tax Rates
While there are still seven tax brackets, the number of them have been reduced. For example, the top tax rate is 37% (down from 39.6%). Overall, this means a lower tax bill for many individuals. It won't work out favorably for all, however. Take this example: The old ceiling for the 28% tax rate was $191,650 for a single filer. That 28% bracket is now gone and a single filer at that income level is now in the 32% bracket.
Regarding investment income, the rates that apply to long-term capital gains and qualified dividends are unchanged. However, the breakpoints at which the zero-rate, 15%, and 20% rate apply have been modified somewhat.
3. Higher Standard Deduction Amount
When you file your return, you still have a choice between taking the standard deduction or itemizing your personal deductions. The standard deduction amounts for 2018 are nearly double what they were in 2017: $24,000 for joint filers and surviving spouses, $18,000 for heads of households, and $12,000 for singles and married persons filing separately.
This higher standard deduction amount means you’re more likely not to itemize (it is estimated that just 10% of filers will itemize under the new tax law down from 30% previously). This simplifies your recordkeeping.
And the increased standard deduction amounts also affect whether you’re required to file any tax return because there are now higher filing thresholds reflecting these higher standard deduction amounts.
4. No Personal and Dependency Exemptions
In the past, you could claim exemptions for yourself (and spouse) as well as for your children and other dependents ($4,050 for each exemption in 2017). No more. Exemptions have been eliminated for 2018 (through 2025) on the theory that they’re more than made up by an increased child tax credit (discussed next), the higher standard deduction amount, and other favorable tax changes.
5. Increased Child Tax Credit
If you have a child under the age of 17, you may be eligible for a $2,000 tax credit, $1,400 of which is refundable (payable even if more than the tax you owe). The child tax credit in 2018 is double what it used to be. You can take the credit for each eligible child.
Also, the income limits on eligibility have been dramatically increased — $400,000 for joint filers and $200,000 for other filers. This means more individuals are eligible to claim the credit.
And there’s a new child tax credit of up to $500 for other dependents who are not your qualifying child (e.g., a disabled child of yours who is age 22 and lives with you). This credit is not refundable but cuts your tax bill dollar-for-dollar.
6. SALT Limitation
If you itemize deductions, the amount you can write off for state and local taxes (SALT), including state income or sales tax and local property taxes, is limited in 2018 to $10,000 ($5,000 for married persons filing separately). Until now, there was no limit.
If you live in a high tax state, you likely won’t be able to deduct all of your SALT. Some states have enacted or are considering enacting workarounds to enable their residents to get a federal tax break for SALT payments. However, the IRS has already nixed one attempt. It’s unclear whether states will go back to the drawing board on this one.
7. Cap on Mortgage Interest
If you obtained a mortgage to buy or build your principal residence (plus one other home) before Dec. 16, 2017, you’re in the clear and can deduct all your mortgage interest (called “acquisition indebtedness”) on borrowing up to $1 million ($500,000 if you’re married and file separately). But if you have a newer mortgage, you’re limited to interest on $750,000 (again half that if you’re married and file separately).
Until now, individuals tapped the equity in their homes to pay off credit card debt, take a vacation, or finance their child’s education. But on 2018 returns no deduction can be taken for interest on a home equity loan, regardless of when you obtained it. However, if you use the proceeds to add an addition to your home or make other substantial improvements, the interest is viewed as acquisition indebtedness, which is deductible subject to the overall limit above.
8. Miscellaneous Unreimbursed Deductions
If you’ve been deducting unreimbursed, employee business expenses, such as union dues, business driving, and job-hunting expenses, you’re now out of luck. No deduction is allowed for miscellaneous itemized deductions that were subject to a 2% of adjusted gross income (AGI) floor. One hopes, your employer has or will adopt an accountable plan to reimburse you for business expenses; you won’t be taxed on this reimbursement.
In the same vein, investment expenses, such as safe deposit box rentals and investment advisory fees, are no longer deductible. They too had been miscellaneous itemized deductions subject to the 2%-of-AGI floor. One job-related deduction was saved: The deduction of up to $250 for teachers who buy school supplies for their classroom remains.
9. Federally Declared Disaster Losses
The itemized deduction for casualty and theft losses to personal-use property, such as your home, household items, car, and jewelry, can only be claimed if losses are the result of federally declared disasters. So those with uninsured losses from such disasters in 2018 as the Mt. Kilauea volcanic eruption, Hurricanes Florence or Michael, or the California wildfires may be eligible for a write-off. Check with FEMA for 2018 disaster declarations.
10. Higher AMT Exemption
Until now, about four million individuals (mostly those with income between $200,000 and $500,000) paid the alternative minimum tax (AMT) because it was greater than their regular tax liability. But that’s now changed.
For 2018, the AMT exemption amount is increased to $109,400 for joint filers and surviving spouses, $70,300 for singles and heads of households, and $54,700 for married persons filing separately. What’s more, the point at which these exemption amounts begin to phase-out has been increased to $1 million for joint filers and surviving spouses or $500,000 for other filers.
The result of these higher amounts: it’s estimated that only about 200,000 taxpayers will pay this dreaded tax in 2018. In short, if you weren't subject to the AMT before and your income situation has remained roughly the same, you have even less reason to worry about it going forward.
11. Adjustments to Gross Income
Do you contribute to an individual retirement account (IRA) or Health Savings Account (HSA)? These and most other deductions you can take whether you itemize or take the standard deduction haven’t changed (although there’ve been some adjustments to the numbers for inflation).
But the moving expense deduction that also was above the line is gone unless you are active-duty military moving as the result of military orders. If you relocate for a job or for your business, you can’t deduct the cost of moving your household. What's more, if your employer reimburses you for moving costs starting in 2018, you’re going to be taxed on this.
12. A 20% Deduction for Business Income
If you are an independent contractor or own a business (other than a C corporation), you may be eligible for a qualified business income (QBI) deduction. To the extent you’re eligible, you take it directly on Form 1040 as a personal deduction, whether you itemize or use the standard deduction.
13. Higher Estate Tax Exemption
Filing annual income tax returns isn’t the full extent of the federal taxing arm; there are also estate and gift taxes. While the federal estate tax continues to apply, a giant exemption amount means that only very wealthy individuals need to be concerned with tax planning for their heirs. For those dying in 2018, the exemption is $11.18 million. (The same exemption amount can be used to gift property during your lifetime.) And for married couples, any unused amount can be applied toward the surviving spouse’s estate in the future. But don’t ignore lower exemptions that apply in some states.
The Bottom Line
Will you come out better or worse on your 2018 return as compared with your tax bill for 2017? Only completing your return will tell. Chances are that if you live in a low-tax state and don't itemize, you'll see a nice tax break. On the other hand, if you live in a higher-tax state (and also pay state and local taxes) – and if you have a big mortgage and have been accustomed to itemizing – you may see a bigger tax bill. This may also be true if you're in that unfortunate slice of low-six-figure earners who moved from the 28% to the 32% tax bracket.