You may have heard rumors by now about the new 2018 tax reform bill.
These new tax reform changes went into effect this past Jan. 1. According to the Ways and Means Committee in the House of Representatives, the stated purposes of the new law include:
- Simplifying the tax process
- Preserving the mortgage interest deduction
- Eliminating Obamacare’s individual mandate penalty tax
- Increasing the standard deduction
- Providing more support to American families
- Providing relief for Americans with expensive medical bills
- Improving savings vehicles for education
This legislation could significantly alter your tax situation this year. Here is a summary of several changes that may affect you:
Standard Deduction Increases. No matter your filing status, the standard deduction increases in 2018.
- Single and Married Filing Separately: $12,000
- Married Filing Jointly: $24,000
- Head of Household: $18,000
Personal Exemption Eliminated. Under the tax reform, taxpayers can no longer claim the $4,050 personal exemption for each of their dependents.
Child Tax Credit Rises. The Child Tax Credit increases in value from $1,000 to $2,000. The tax reform bill also introduces a new $500 credit for non-child dependents.
State and Local Taxes Capped. Taxpayers can deduct up to $10,000 in state and local income taxes. Previously, there was no cap.
ACA Individual Mandate Repealed. Beginning in 2019, individuals who choose to go without health care coverage for the year will not have to pay tax penalties.
Mortgage Interest Deduction Drops. Individuals who purchase a home in 2018 can only deduct interest up to $750,000 in mortgage debt (previously, $1 million). The interest deduction on home equity loans is eliminated.
Estate Tax. The estate exemption doubles to $11.2 million per individual and $22.4 million per couple in 2018.
Contribution Limits for Retirement Savings. Employees who participate in certain retirement plans, such as 401(k), 403(b), 457 and Thrift Savings Plans can now contribute as much as $18,500 this year. This is a $500 increase over the 2017 limit.
Savings in IRAs. Savers who contribute to individual retirement accounts will have higher income ranges following cost-of-living adjustments. Note that the deduction phases out for individuals and their spouses who are covered by workplace retirement plans.
For single taxpayers, the limit will be $63,000 to $73,000.
For married couples, the phase-out range will vary depending on whether the IRA contributor is covered by a workplace retirement plan or not. When the spouse who is investing has access to an employer plan, the range is $101,000 to $121,000. For individuals who don’t have a retirement plan but are married to someone who does, the phase-out has been raised to $189,000 to $199,000.
The phase-out was not adjusted for married individuals who file a separate return and who are covered by a workplace retirement plan. That range is $0 to $10,000.
Contributions to Roth IRAs. For individuals who are single or the heads of their households, the income phase-out has been raised to $120,000 to $135,000. For married couples who file jointly, the range climbs to $189,000 to $199,000.
The phase-out was not adjusted for married individuals who file a separate return. That is $0 to $10,000.
Lost Deductions. The 2017 tax reform eliminated or restricted many itemized deductions beginning in 2018 (including unreimbursed business expenses) and raised the standard deduction. That means fewer taxpayers are likely to itemize.
Bottom Line. Taxes can get confusing quickly. This new tax law could potentially affect what you pay by thousands of dollars. You may want to consult your tax or financial advisors.
Paul Toepel is a CPA who has lived in Las Sendas for more than 17 years. His firm, Toepel Company PC, is a full-service, Mesa-based CPA firm offering a variety of services for more than 30 years.
These services include tax preparation and representation, accounting, fraud prevention and QuickBooks support. Their mission is, “To provide exceptional service, knowledge and experience, all while making you and your business successful.”
For more information, call (480) 833-8300. Toepel Company is located at 2500 S. Power Road, Suite 129.