The 2019 tax season (for the 2018 tax year) is underway, and the Internal Revenue Service is expecting 160 million returns by the time it's all over. This year, many of the changes implemented by the 2017 Tax Cuts and Jobs Act go into effect and will have pronounced implications for many taxpayers. With so many changes affecting the 2018 tax year, it's best to do your homework and avoid confusion. Tax software and accountants can help, but don't leave anything to chance.
Last year, the tax filing deadline changed due to the celebration of Emancipation Day, a public holiday in Washington, D.C. Because the standard April 15 deadline fell on a Sunday and Emancipation Day on Monday, April 16, taxpayers had until Tuesday, April 17, to file returns. This year, the official tax filing deadline is Monday, April 15. The Patriots Day holiday (April 15 in Maine and Massachusetts) and the Emancipation Day holiday (April 16 in the District of Columbia) means Maine or Massachusetts taxpayers again get until April 17.
The modified adjustable gross income limits for contributing to Roth IRA accounts have been raised. Workers can contribute the full $5,500 maximum ($6,500 for those 50 and older) if they earn adjusted gross income of up to $120,000 for single filers or $189,000 for married couples filing jointly. Contribution amounts 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.
Tax brackets from 2017 all got an overhaul. The 2018 tax brackets are now 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent, with the thresholds for each changed. The biggest changes come to the highest four tax brackets, and while the threshold for the top tax bracket has been raised (to $500,000 for singles from $418,000, and to $600,000 for married filing jointly from $470,000), the floor for the second-highest bracket has dropped (to $200,000 for singles and $400,000 for married filing jointly from $416,700 for singles and married filing jointly).
Due to inflation adjustments, the limits for many tax provisions changed in 2018. But the change in tax laws from 2017 applies to the standard deduction in 2018, pushing it from $9,350 for those filing as head of household to $18,000. The personal exemption, which was $4,050 in 2017, has been eliminated.
Everyone is a senior now! Until recently, 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, 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 set the threshold for everyone at 7.5 percent of gross income and made it retroactive to 2017. It stays in place for 2018, but will go back to 10 percent of AGI in 2019.
Casualty and theft losses are no longer deductible, so damage to your home from either burglary or natural disaster that wasn't a federally declared disaster won't be softened by a tax break. Meanwhile, deductions for tax-preparation fees, unreimbursed business expenses, union dues, and investment expenses that were available in 2017 have all been dropped.
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 jumped to 54.5 cents in 2018 from 53.5 cents in 2017 (but increases to 58 cents in 2019). Taxpayers can also take a 18-cent-per-mile deduction for eligible miles driven for medical or moving purposes in 2018, up from 17 cents in 2017 (it's 20 cents in 2019). 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 are still eligible to deduct interest on up to $1 million in mortgage debt. If you happened to sign on that date or later, though, 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 trouble.
The interest deduction for home equity loans not related directly to home improvements disappears completely, regardless of when a homeowner took out the loan. That means interest on a home equity loan used to build an addition is deductible, while interest on a similar loan to pay personal living expenses, such as credit card debt, is not.
Under 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, there's no way to increase the deduction. The new tax law prohibited prepaying 2018 state and local taxes that were not imposed in 2017.
With the standard deduction now so high, it will take a lot more charitable giving to make it a worthwhile deduction. But if you do make large contributions and itemize those deductions, the threshold for deductions has jumped to 60 percent of your adjusted gross income from 50 percent.
Recent tax reform has eliminated the health care mandate and its penalties, but not for 2018. Since 2014, those without health insurance have had to pay increasing penalties unless they qualify for a limited number of exemptions. In 2018, 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. The penalty will be erased completely in 2019.
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 of studies. 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.
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? If it was 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. The new law also increased the maximum deduction to $1 million from $500,000, with the phase-out threshold increasing to $2.5 million from $2 million.
Those who took advantage of the child tax credit in 2017 could claim a $1,000 credit on their income tax return for each child under 17 who qualified. In 2018, that deduction doubles to $2,000 per qualifying child. The credit was also nonrefundable in previous years, but can now be refunded to 15 percent of earned income over $2,500, or up to $1,400. For children to qualify, they must have been 16 years or younger on the last day of 2018, be related to you, be claimed as a dependent, be a documented U.S. citizen or resident, live with you for half the tax year (though absences related to school, vacation, military service, and medical care are exempt), and must not provide more than half their own support. The new child tax credit phases out for married taxpayers filing jointly with an income of $400,000 (or $200,000 for all other taxpayers).
If children don't qualify for the Child Tax Credit because they are over 17, they may still be eligible for a $500 credit under the tax reform. The credit also applies for dependents who are elderly or disabled.
This tax reform took effect only Jan. 1. If you finalized a divorce in 2018, you can still deduct the alimony payout on your 2018 returns, while recipients will have to include that payment as part of taxable income. For 2019 and beyond, alimony payments can no longer be deducted by the payer, but don't have to be reported as taxable income by the recipient.
Under old laws, a tax-advantaged 529 savings plan could be used only at eligible colleges and universities. Those plans can now cover $10,000 per year of qualifying expenses for any school and any grade from kindergarten through high school — public, private, and religious institutions included. Existing 529 plans also can be rolled over into ABLE 529 plans for people living with disabilities and for the education of children with disabilities.
The so-called "kiddie tax" applies to children under age 19 and college students under age 24 who have unearned income over $2,100 — including dividends, capital gains, or interest on investments. Qualifying income will be taxed at the rate for trusts and estates on returns filed in 2019: Any amount up to $2,550 at 10 percent, up to $9,150 at 24 percent, up to $12,500 at 35 percent, and anything above $12,501 in a 37 percent bracket. For long-term capital gains and qualified dividends, anything up to $2,600 goes untouched. From there to $12,700, it's taxed at 15 percent, with anything above that taxed at 20 percent.
A minor point, the IRS started testing this anti-fraud initiative in 2017 and is expanding it. Roughly 60 million W-2 forms will bear a 16-digit alphanumeric verification code this year. Don't worry if there isn't a code; not every W-2 will have one. Even if taxpayers leave off or fill in a verification code incorrectly, it won't delay the processing of their tax returns.
