Federal Employees News Digest
New tax rules facing individuals as they prepare 2018 tax returns
- By Edward A. Zurndorfer
- Mar 18, 2019
Many employees are busy at this time preparing their 2018 Federal tax returns. The Tax Cuts and Jobs Act (TCJA) of 2017 has resulted in many tax law changes affecting individual tax returns. These changes will be in effect for the years 2018-2025. This column discusses the major changes affecting tax returns for the year 2018.
• Personal exemptions. Personal exemptions are not being repealed; they have simply dropped to zero. Dependent information will still be required for the child tax credit, dependent care credit, earned income tax credit, the American Opportunity tax credit (AOTC), and other worksheets and forms relying on dependent information.
•Standard deduction. For all filing statuses, the standard deduction amounts for 2018 have nearly doubled their 2017 amounts. For singles and married filing separately (MFS) the 2018 amount is $12,000; for head of household (HOH) the 2018 amount is $18,000; and for married filing jointly the 2018 standard deduction is $24,000. For single and HOH files over age 65 or blind, there is an additional $1,600; with married couples in which each spouse is 65 or blind there is an additional standard deduction of $1,300 for each spouse.
• Itemized deductions. Total state and local income or sales taxes, real estate taxes and personal property taxes cannot exceed $10,000 no matter one’s filing status, unless one files as MFS in which the limit is $5,000. Miscellaneous deductions including expenses of employee office in the home, tax preparation fees, union dues, and investment expenses are no longer available. Casualty and theft losses, if not a result of a loss incurred in a federal declared disaster area, are not available.
• Changes and expansion of tax brackets. Effective for 2018, the tax brackets for individual filers are 10, 12, 22, 24, 32, 35 and 37 percent. The changes from 2017 range between zero percentage points for the bottom bracket and the second to highest tax bracket, to three-to-four percentage points for the middle brackets. The highest tax bracket has been reduced by 2.6 percentage points.
• Investments. Capital gains and qualified dividends will continue to be taxed at the 0, 15 and 20 percent rates, but the breakpoints have been adjusted. The maximum income for the “0” percent rate is $77,200 for married joint filers and $51,700 for heads of households. The 15 percent tax rate will apply to married joint filers with incomes up to $479,000, singles and married separate filers with incomes up to $425,800, and heads of households with incomes up to $452,400. The brackets are indexed to inflation.
The additional 3.8 percent net investment income (NII) surtax on capital gains and dividends was not repealed. Married couples filing joint returns with NII and modified adjusted gross incomes above $250,000 and single filers with NII above $200,000 must pay the NII surtax on capital gains and dividends.
• Roth IRA conversions. The ability to recharacterize a Roth IRA conversion has been repealed. Effective Jan. 1, 2018, the law states that once an individual converts a traditional IRA to a Roth IRA, the individual can no longer undo the conversion.
• Health care changes. For 2018, the individual shared responsibility provision of the Affordable Care Act, also known as the “individual mandate”, requiring adults and children to have minimum essential coverage, qualify for a health coverage exemption, or make a shared responsibility payment with his or her individual tax return, is in force as it has been the last few years.
Also, medical expenses exceeding 7.5 percent of one’s adjusted gross income and not reimbursed by any insurance are deductible for 2018. The deduction “floor” is increasing to 10 percent of adjusted gross income on Jan. 1, 2019.
• Child tax credit. The child tax credit has been increased to $2,000 with a new adjusted gross income threshold of $400,000 for married joint filers and $200,000 for all other filers. The credit is refundable up to $1,400. A Social Security number must be provided for each qualifying child the credit is claimed on.
• Mortgages and home equity loans. The interest on home equity loans and lines of credit is still deductible to the extent the loan is used to build, buy or improve one’s main home. For mortgages taken out after Dec. 15, 2017, there is an acquisition indebtedness limit of $750,000 for which mortgage interest may be deducted. For mortgages taken out after Oct. 13, 1987 and before Dec. 16, 2017, the acquisition indebtedness is limited to $1,000,000.
• Alternative minimum tax. The alternative minimum tax (AMT) was not repealed by the TCJA but the amount of income exempt from the AMT and the “phase- out” thresholds were increased. The AMT income exemption amount for married filing jointly is $109,400 and $70,300 for single filers in 2018. The “phase out” levels are $1 million and $500,000 respectively, with the exemption amount “phase out” ending at $1,437,600 and $781,200 respectively.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681