13 Tax Law Changes You Need to Know Before Filing a Return In 2018
The 2018 tax season (for the 2017 tax year) is underway, and the Internal Revenue Service is expecting 155 million returns by the time it's all over. Though acting early is advisable if you want to prevent identity theft and fraud, the IRS still advises taxpayers to wait for official documents (W-2s, annual statements, etc.) before filing, to get it right the first time. Though changes in the tax code for 2017 filing are fairly tame compared with what Congressional tax reform will do to the code for 2018, it's best to do your homework and avoid confusion. Tax software programs and accountants can help, but don't leave anything to chance.
The IRS partners with tax preparation software companies to offer qualified taxpayers a free way to prepare and file a federal (and sometimes state) tax return. For the 2017 tax season, the income limit for using the Free File software increased to $66,000 from $64,000 in 2017.
As with last year, the tax filing deadline is pushed forward due to the celebration of Emancipation Day, a public holiday in Washington, D.C. Because the standard April 15 deadline falls on a Sunday and Emancipation Day lands on Monday, April 16, taxpayers have until Tuesday, April 17, to file returns.
Everyone is a senior now! Back in tax year 2016, taxpayers 65 years or older could deduct total medical expenses that exceeded 7.5 percent of their adjusted gross income. Even married couples that included one person 65 or older were eligible for that 7.5 percent threshold, but younger, single taxpayers could deduct only medical expenses that exceeded 10 percent of their AGI. For 2017, that threshold was slated to jump to the 10 percent of AGI for everyone, including those over 65; the recent tax reform, however, set the threshold for everyone at 7.5 percent of gross income and made it retroactive to 2017.
The modified adjustable gross income limits for contributing to Roth IRA accounts have been raised for 2017. Workers can contribute the full $5,500 maximum ($6,500 for those 50 and older) if they earn adjusted gross income of up to $118,000 for single filers or $186,000 for married couples filing jointly. Contribution amounts then phase out depending on modified income. Those who already have contributed too much can avoid paying the penalty by withdrawing the excess contribution and earnings before filing.
Due to inflation adjustments, the limits for many tax provisions changed in 2017. For example, the standard deduction rose to $9,350 from $9,300 for those filing as head of household. The personal exemption held steady at $4,050, but now starts phasing out for individuals who made $261,500 or more.
The self-employed can take a deduction for eligible work-related use of their vehicle. Rather than calculating the actual cost of work-related activities, one can use the standard mileage rate, which dropped to 53.5 cents in 2017 from 54 cents in 2016 (but jumps to 54.5 cents in 2018). Taxpayers can also take a 17-cent-per-mile deduction for eligible miles driven for medical or moving purposes in 2017, down from 19 cents in 2016 (it's 18 cents in 2018). The standard mileage rate for charitable activities is unchanged at 14 cents.
If you bought a home and had the mortgage in place before Dec. 15, 2017, you're still eligible to deduct interest on up to $1 million in mortgage debt. If you happened to sign on that date or later, your threshold drops to $750,000. In places where the median home price exceeds $1 million -- looking at you, San Francisco and Silicon Valley -- that could be troublesome. Oh, and the interest deduction for home equity loans not related directly to home improvements disappears completely, regardless of when a homeowner took out the loan.
Under new tax reforms, deductions for state and local taxes (property tax and sales or income tax) are capped at $10,000 from 2018 through 2025. If your total state and local taxes and property taxes are typically more than the $10,000, however, don't think that you can just pay a portion in 2017 and get the full tax deduction on your 2017 taxes. The new tax law prohibits prepaying 2018 state and local taxes that were not imposed in 2017.
Recent tax reform has eliminated the health care mandate and its penalties, but not for 2017. Since 2014, those without health insurance have had to pay increasing penalties unless they qualify for a limited number of exemptions. In 2017, the penalty was the higher of $695 per adult or 2.5 percent of the household's AGI. The penalty is $347.50 for children under 18. The penalty is capped at $2,085 for a household, paid when the tax return is filed. If additional tax is owed, the penalty is added to the amount due. If a refund is due, the penalty is deducted from the amount owed the taxpayer.
Congress found plenty of time to rip up and rewrite tax law for 2018 and beyond, but it never got around to renewing a tuition-and-fees deduction on form 1040 used by more than 1.7 million filers to deduct an average of $2,200 apiece. That's roughly $400 in tax savings gone, but largely for graduate students and undergrads in a fifth or sixth year. The Lifelong Learning Credit (20 percent of the first $10,000 of qualified education expenses, maximum credit of $2,000) and American Opportunity Credit ($2,500 maximum) are still available to those who qualify.
This is the wrong year to get a Form 1099-C for canceled debt on your qualified principal residence (through short sales, foreclosure, or other means). Under the Mortgage Forgiveness Debt Relief Act, that forgiven debt wasn't considered income; but that act's powers were extended only through 2016. Unless an agreement for cancellation of debt was signed at the tail end of 2016, making it covered by the act, any debt cancellation in 2017 is considered income.
Did you buy new office furniture, computer servers, cranes, end loaders, cattle, trucks, or taxis for a business last year? Did you build oil derricks, warehouses, office space or, utility plants? Well, if you did so after Sept. 26, 2017, the bonus depreciation you could claim on the first year of owning those assets increased from 50 percent just a day before to 100 percent of "expensing" from Sept. 27 onward. Recent tax reform also extended bonus depreciation from items bought or built new to both new and used assets. That "expensing" also applies to productions (qualified film, television, and or staged performances) and certain fruit or nuts planted or grafted after Sept. 27.
A minor point, the IRS started testing this anti-fraud initiative in 2017 and is expanding it in 2018. One out of every four W-2 forms will have a 16-digit alphanumeric verification code listed on them this year. Don't worry if there isn't a code, the IRS is testing the system this year and not every W-2 will have one. Even if taxpayers leave off or incorrectly fill in a verification code, it won't delay the processing of their tax returns.