A Guide to 2018 Tax Laws (and More)

The News You Need To Know | March 2018

The legislation popularly known as the Tax Cuts & Jobs Act did not exactly “rewrite the book” of federal tax laws, but it almost seems that way. On January 1, a host of important, new tax provisions entered the Internal Revenue Code, and others were suddenly repealed.

Due to these reforms, federal tax law has changed to a degree unseen since the 1980s. This guide reviews the major adjustments to the Internal Revenue Code and more:

• Key tax changes for households
• Tax breaks gone in 2018
• Social Security & Medicare changes
• COLAs & Phase-Out Range Adjustments
• Last, but not least, some other interesting developments

Just a reminder as you read this guide: you should consult with a qualified tax or financial professional before making short-term or long-term changes to your tax or financial strategy.

Key Tax Changes for Households

Whether you file singly, jointly, or as a head of household, you will want to keep these significant alterations to federal tax law in mind. These new tax provisions will remain in place through at least 2025.

1 Lower income tax rates and adjusted tax brackets.

Thanks to the tax reforms, the seven income tax brackets have been revised. The new taxable income thresholds:

The federal government is now using the Chained Consumer Price Index to calculate inflation. That should reduce the size of the yearly adjustments to these brackets.

In scrutinizing all this, you may notice something: the “marriage penalty” applying to combined incomes is nearly gone. That is, the thresholds for joint filers are simply double what they are for single filers for five of the seven brackets. Only married couples in the two uppermost brackets now face the “marriage penalty”. ^1,2

2   The standard deduction nearly doubles.
While the personal exemption is gone (more about that later), the new law gives an enormous boost to the standard deduction in 2018 for all filers.²

• Single filer: $12,000 (instead of $6,500)
• Married couples filing separately: $12,000 (instead of $6,500)
• Head of household: $18,000 (instead of $9,350)
• Married couples filing jointly & surviving spouses: $24,000 (instead of $13,000)

Incidentally, the additional standard deduction remains in place. Single filers who are blind, disabled, or aged 65 or older can claim an additional $1,600 deduction for 2018. Married joint filers can claim additional standard deductions of $1,300 each for a total additional standard deduction of $2,600 in 2018.³

3  AMT exemption amounts are much larger.

The Alternative Minimum Tax was never intended to apply to the middle class – but because it went decades without inflation adjustments, it sometimes did. Thanks to the tax reforms, the AMT exemption amounts are now permanently subject to inflation indexing.

Look at the change in AMT exemption amounts for 2018:

• Single filer or head of household: $70,300 (was $54,300 in 2017)
• Married couples filing separately: $54,700 (was $42,250 in 2017)
• Married couples filing jointly & surviving spouses: $109,400 (was $84,500 in 2017)

These increases are certainly sizable, yet they pale in proportion to the increase in the phase-out thresholds. They are now at $500,000 for individuals and $1 million for joint filers, as opposed to respective, prior thresholds of $120,700 and $160,900.²

4 The Child Tax Credit doubles to $2,000. 

In compensation for the loss of the personal exemption, the Tax Cuts & Jobs Act boosted this credit, which is especially significant for large families. Up to $1,400 of the CTC is now refundable. Phase-out thresholds for the credit have moved north dramatically. They are now set at the following modified adjusted gross income (MAGI) levels:

• Single filer or head of household: $200,000 (was $75,000 in 2017)
• Married couples filing separately: $400,000 (was $110,000 in 2017)

Also, the Child & Dependent Care Tax Credit remains – parents still have a chance to deduct qualified child care expenses of up to $1,050 for one child under age 13 or $2,100 for two children under age 13. Dependent care Flexible Spending Accounts (FSAs) are still allowed as well: employees may save up to $5,000 of pre-tax dollars per year to help pay for qualified child care expenses.

Lastly, see the “Other Interesting Developments” section of this guide to learn about a significant non-financial change involving the Child Tax Credit.^2,4

5  You may be eligible to claim a new $500 non-refundable credit for non-child dependents. 

This represents an effort to compensate for the loss of the personal exemption taxpayers could previously claim for non-child dependents. The MAGI phase-out thresholds applicable to the Child Tax Credit also apply to this “family credit.” You are eligible to claim it if you have qualifying dependents in your household who do not meet the federal tax definition of a qualifying child: parents, relatives, children age 17 or older.^2,5

6  The yearly SALT deduction is capped at $10,000. 

This is arguably the most controversial tax law change of 2018 for individual taxpayers. If you live in a high-tax state (or alternately, a state that imposes no income tax), you may be grumbling about the new cap on the state and local tax (SALT) deduction. You can now only deduct up to $10,000 of some combination of a) state and local property taxes or (b) state and local income taxes or sales taxes annually. Taxes paid or accumulated as a consequence of trade activity or business activity are exempt from the $10,000 limit.

The SALT deduction cap is just $5,000 for married taxpayers who file their returns separately.^1,6

7  The ceiling on the mortgage interest deduction falls to $750,000. 

As the median U.S. home price is well under $750,000, a relatively small percentage of homebuyers will be affected by this change. The new annual $750,000 limit applies for any taxpayer taking out a home loan between December 15, 2017 and December 31, 2025. For those who arranged their mortgages prior to this window of time, the $1 million ceiling remains in place.

There is much more to note on this topic. When the Bipartisan Budget Act of 2018 became law on February 9, a pair of expired tax breaks were retroactively reinstated for the 2017 tax year: taxpayers still have an opportunity to deduct mortgage insurance premiums and may also exclude income from the discharge of debt on their principal residence, if eligible for such a deduction. Regarding mortgage insurance premiums, a taxpayer is fully eligible to claim that deduction when his or her adjusted gross income (AGI) is below $100,000 (a phase-out range occurs between $100,000-$110,000). The total of the mortgage insurance premiums is treated as additional deductible mortgage interest. ⁷

Homeowners should also be aware that the annual mortgage interest deduction is now just $375,000 for married taxpayers filing separately and that the deduction for interest paid on home equity debt has disappeared. ^2,6

8  The qualified medical expense deduction improves. 

One of the few itemized deductions kept under the tax reforms also has a lower threshold this year. You can now deduct any out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income (AGI). This applies to qualified medical expenses in 2017 and 2018. (The old deduction threshold was 10%.)^2,6

9  529 plan assets may now be used to pay for qualified elementary education expenses. 

Prior to 2018, 529 plans were college savings vehicles only; assets within them were earmarked for payment of qualified higher education expenses. Now, federal tax law says you can also distribute up to $10,000 a year from a 529 plan to pay for K-12 tuition, tutoring, and linked curriculum materials and that these qualified distributions will be tax-free. Some state laws governing 529 plans do not allow this, however. As a result, 529 plan participants in select states are being told to wait before devoting any 529 plan assets to elementary education, as they risk wading into a gray area in terms of tax law by doing so. ^6,8

Incidentally, funds from 529 plans may not be used to pay homeschooling expenses for students who would otherwise attend classes in grades K-12. ⁸

10  No one may recharacterize a Roth IRA conversion. 

Before this year, a traditional IRA owner who “went Roth” and subsequently changed his or her mind had a chance to undo the conversion within a certain time frame. This option is now disallowed. ⁹

11  The federal estate tax exemption doubles. 

Very few households will pay any death taxes during 2018-25. This year, the estate tax threshold is $11.2 million for individuals and $22.4 million for married couples; these amounts will be indexed for inflation. The top death tax rate stays at 40%. ^2,6

12  Two changes apply to the charitable deduction. 

The charitable deduction was retained amid the tax reforms, but middle-class taxpayers may have far less incentive to donate to charity than they once did due to the greater standard deduction. A pair of adjustments have been made. One, taxpayers can now deduct charitable donations equal to 60% of their incomes; previously, the limit was 50%. Two, charitable contributions made to a university or college that give the donor the right to buy sports tickets are no longer deductible. ²

Tax Breaks Gone in 2018 

Due to the reforms, some standbys of federal tax law are gone this year and for the foreseeable future. It is too early to tell if they will return in coming years.

1  Personal exemptions are eliminated. 
In the interest of simplification, the new tax reforms repeal the core personal exemption, plus the exemptions taxpayers could claim for relatives and dependent children. (The personal exemption phase-out rule naturally disappears as well.) The new $12,000 standard deduction financially surpasses the previously scheduled combination of the personal exemption and standard deduction for 2018 ($6,500 standard deduction + $4,150 personal exemption). ^1,2

2  Many itemized deductions are gone. 
When the Tax Cuts & Jobs Act headed to Congress in fall 2017, it appeared the list of repealed deductions would be very long. While some itemized deductions were retained, the list of lost deductions includes the following:

• Home equity loan interest deduction
• Moving expenses deduction
• Casualty and theft losses deduction (though it still applies this year in certain areas; see the “Other Interesting Developments” section)
• Unreimbursed employee expenses deduction *Subsidized employee parking and transit deduction
• Tax preparation fees deduction
• Investment fees and expenses deduction
• IRA trustee fees (if paid separately)
• Convenience fees for debit and credit card use for federal tax payments
• Home office deduction
• Unreimbursed travel and mileage deduction

Under the conditions set by the reforms, many of these deductions could be absent through 2025. ^12,13

Several expired deductions have been put back into place for the 2017 tax year, thanks to the Bipartisan Budget Act of 2018.

• The above-the-line deduction for qualified tuition and related expenses was retroactively reinstated for TY 2017. With this in place again, a taxpayer has the option to take a deduction for the amount of tuition and linked higher education expenses from adjusted gross income (AGI) on page 1 of Form 1040, if it provides a better tax break than claiming the Lifetime Learning Credit or the American Opportunity Tax Credit for the same expenses.
• As noted earlier, the deduction for mortgage insurance premiums is back.
• So is the chance to exclude the amount of debt forgiven on your principal residence from your taxable income.
• Three credits pertaining to energy efficiency have been restored for 2017. One, the 10% tax credit for energy-efficient home improvements returns, with its $500 ceiling now limited to a lifetime available credit. Two, the 10% residential energy property credit for the use of qualified fuel cell, small wind energy, fiberoptic solar lighting, and geothermal heat pump components returns – in fact, these credits will be offered through 2021. Three, the 10% tax credit for buying a two-wheeled, plug-in electric vehicle returns, with a limit of $2,500.
• If you are eligible to claim the Earned Income Tax Credit for 2017, you can either use your earned income from 2016 or 2017 to calculate the credit – whichever amount gives you the chance for a larger tax break.⁷

Social Security & Medicare Changes 

1  Social Security benefits increase 2.0%. 

This increase in retirement income is essentially eaten up by higher Medicare Part B premiums for many seniors, however (see #3 below).¹⁴

2  Social Security withholding thresholds are higher. 

Before and during the year you reach Full Retirement Age, Social Security withholds some of your benefits when your earned income surpasses certain thresholds.

If you have yet to reach your FRA, you may earn up to $17,040 in 2018 before having $1 in benefits withheld for each additional $2 in earned income above that level.

If you reach your FRA in 2017, you may earn as much as $45,360 before having $1 in benefits withheld for each additional $3 in earned income above that level. ¹⁴

3  Many seniors are paying higher Medicare Part B premiums this year. 

In 2017, Medicare’s “hold harmless” statute held Part B premium costs down for about 70% of Medicare enrollees. While around 30% of Medicare recipients paid about $134 per month for Part B coverage, others paid Part B premiums of just $107-109 as a result. They got this discount because the “hold harmless” rule says that on an annual basis, Part B premiums cannot increase more than Social Security’s cost-of-living adjustment – and the 2017 COLA was tiny.

This year, about 42% of Medicare recipients will pay the standard Part B premium even though they are subject to the “hold harmless” provision, as the annual increase in their Social Security benefits will equal or surpass the increase in their Part B premiums. Around 28% of recipients will pay less than $134 per month for Part B, since the annual increase in their Social Security benefits will be less than the Part B premium increase. ¹⁵

4  Medicare’s Part A deductible increases. 

In 2017, the Part A deductible (on hospital stays) is $24 higher than in 2017, rising to $1,340. The yearly Part B deductible remains at $183. ¹⁵

5  There are some Part D adjustments of note. 

Medicare enrollees in Part D drug plans will pay only 35% of the cost of brand-name medications and 44% of the cost of generics while in the “donut hole” in 2018. Average monthly premiums for stand-alone Part D drug plans are expected to become $1.20 cheaper this year; the projected average is $33.50. The annual Part D plan deductible limit rises $5 this year to $405. ¹⁶

6  New I.D. cards are being issued to Medicare recipients. 

“Why did Medicare put my Social Security Number on my Medicare I.D. card?” If you have ever asked this question (and in this age of rampant identity theft, you may have asked it more than once), you will be glad to know an answer to this problem is just ahead. Medicare is mailing out new I.D. cards in April. These new cards will not have your SSN, but a new 11-character Medicare Beneficiary Identifier (MBI) code made up of numbers and upper-case letters. ¹⁷

COLAs & Phase-Out Range Adjustments 

Here are some details pertaining to retirement plans and other items largely unaffected by the 2018 tax reforms.

1  Many cost-of-living adjustments have been made. 

• 401(k), 403(b), 457 Plan Contribution Limits   The ceiling on elective deferrals to these plans rises to $18,500, with an additional standard catch-up contribution of up to $6,000 permitted for those who will be 50 or older by the end of 2018. ¹⁸
• Defined Contribution Plan Annual Addition Limit   In 2018, the cap on annual employer profit-sharing additions to these plans heads from $54,000 up to $55,000. ¹⁸
• Limit on Income Subject to Social Security Tax   For 2018, the taxable wage base rises to $128,400, an increase of $1,200. ¹⁸
  Health Savings Account Contribution Limits   The annual contribution limit for a self-only policy increases $50 this year to $3,450. It is $4,450 for those who will be 55 and older in 2018. The contribution limit on a family policy rises $150 this year to $6,900 and $7,900 for those who will be 55 and older this year. ¹⁹
• Annual Gift Tax Exclusion  For the first time in five years, this limit gets a COLA. It rises $1,000 to $15,000 in 2018. (It is never adjusted in increments greater than $1,000.) ²¹

Other Interesting Developments 

1  The long-term capital gains tax rate thresholds do not quite sync with the new income tax thresholds. 

Taxpayers in the bottom two marginal tax brackets paid no tax on long-term capital gains tax in 2017. Taxpayers in the top marginal bracket paid a tax of 20%. Everyone else faced a tax of 15%. This year, the long-term capital gains rates are structured as follows:

As for short-term capital gains, they are taxed as ordinary income – and since tax rates fell slightly at the beginning of 2018, any short-term gains you take in could be taxed less than they would have been last year.

The highest earners should know that the 3.8% net investment income tax still exists – it was not repealed in December, and its income thresholds remain the same. ²

2 The individual health insurance mandate is still here for 2018, but scheduled for repeal in 2019.

The Affordable Care Act instituted tax penalties for individual taxpayers who went without health coverage. As a condition of the 2018 tax reforms, no taxpayer will be penalized for a lack of health insurance next year. Adults who do not have qualifying health coverage will face an unchanged I.R.S. individual penalty of $695 this year. ^1,20

3 The electric car credit is still around.

Electric car buyers can claim a credit of as much as $7,500 this year. The credit begins to phase out for buyers of certain makes, however, once a manufacturer sells more than 200,000 plug-in vehicles.²³

4 Chained CPI is now the benchmark for yearly inflation adjustments to federal tax thresholds.

Before 2018, the Consumer Price Index for All Urban Consumers (CPI-U) was the inflation yardstick used to calculate COLAs. Now, the “chained” version of the CPI-U, commonly called the Chained CPI, is being used.

The Chained CPI makes a subtle but important assumption – it assumes that given higher prices, a consumer will choose to substitute a cheaper product or service for a more expensive one in its class. As increases in the Chained CPI are smaller than those of the CPI-U, the switch to the Chained CPI implies that tax bracket and phase-out thresholds will rise in smaller increments, and it also implies smaller COLAs for some credits and deductions. ²

This Special Report is not intended as a guide for the preparation of tax returns. The information contained herein is general in nature and is not intended to be, and should not be construed as, legal, accounting, or tax advice or opinion. No information herein was intended or written to be used by readers for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. Readers are cautioned that this material may not be applicable to, or suitable for, their specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. Both «representativename» and MarketingPro, Inc. disclaim any responsibility for positions taken by taxpayers in their individual cases or for any misunderstanding on the part of readers. Neither Personal Wealth Advisory, LLC nor MarketingPro, Inc. assume any obligation to inform readers of any changes in tax laws or other factors that could affect the information contained herein.

Citations.
1 – cpapracticeadvisor.com/news/12388205/2018-tax-reform-law-new-tax-brackets-credits-and-deductions [12/22/17]

2 – fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx [12/30/17]

3 – forbes.com/sites/kellyphillipserb/2017/12/17/what-the-2018-tax-brackets-standard-deduction-amounts-and-more-look-like-under-tax-reform/ [12/17/17]

>4 – cnbc.com/2017/12/22/tax-reform-breaks-may-help-parents-defray-child-care-cost.html [12/26/17]

5 – forbes.com/sites/kellyphillipserb/2017/12/21/how-will-the-expanded-child-tax-credit-look-after-tax-reform/ [12/21/17]

6 – investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]

7 – bkc-cpa.com/reinstatement-of-2017-expired-federal-tax-deductions/ [2/12/18]

8 – carneysandoe.com/blog-post/529-plans-education [2/6/18]

9 – taxfoundation.org/retirement-savings-untouched-tax-reform/ [1/3/18]

10 – forbes.com/sites/anthonynitti/2018/01/04/the-new-qualified-business-income-deduction-varies-based-on-your-business-type-or-does-it/ [1/4/18]

11 – rsmus.com/what-we-do/services/tax/washington-national-tax/net-operating-losses-after-the-tax-cuts-and-jobs-act.html [1/2/18]

12 – tinyurl.com/y7uqe23l [12/26/17]

13 – forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ [12/20/17]

14 – ssa.gov/news/press/factsheets/colafacts2018.pdf [1/4/18]

15 – cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2017-Fact-Sheet-items/2017-11-17.html [11/17/17]

16 – medicareresources.org/faqs/what-kind-of-medicare-benefit-changes-can-i-expect-this-year/ [9/14/17]

17 – cms.gov/Medicare/New-Medicare-Card/ [1/3/18]

18 – irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions [11/29/17]

19 – trustetc.com/resources/investor-awareness/contribution-limits [1/3/18]

20 – irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged [10/19/17]

21 – pscpa.com/irs-issues-2018-cost-living-adjustments/ [11/1/17]

22 – ascensus.com/news/industry-regulatory-news/2017/10/19/irs-announces-2018-ira-retirement-plan-limitations/ [10/19/17]

23 – vox.com/policy-and-politics/2017/12/19/16783634/gop-tax-plan-provisions [12/19/17]

24 – blog.turbotax.intuit.com/tax-reform/ government-shutdown-averted-and-tax-provisions-providing-tax-relief-passed-33358/ [2/9/18]