What are some of the major changes made to the federal tax code for 2018 by the Tax Cuts and Jobs Act?

Income Tax Brackets and Rates in 2018. The current rates and brackets are shown in the table below. The income limits for all tax brackets and all filers will be adjusted for inflation. The top marginal income tax rate of 37 percent will hit taxpayers with taxable income of $500,000 and higher for single filers and $600,000 and higher for married couples filing jointly.

Itemized Deductions by Category

Medical Expenses: Medical expense deductibility remains basically unchanged from 2017, but must be in excess of 7.5% of your adjusted gross income to be deductible as an itemized deduction.

Taxes: While the new tax law retains deductibility for all the same types of taxes paid the itemized deduction amount is capped at $10,000.00.

Mortgage Interest: While mortgage interest is still deductible new limitations have been added. Personal residence mortgages taken out after December 15, 2017 limit the mortgage interest deduction to interest on $750,000.00 of debt. Existing mortgages as of that date will still allow interest deductions on $1,000,000.00 of debt.

Interest paid on home equity loans are only deductible if the mortgage proceeds were used to acquire, or substantially improve your personal residence.

Charitable Contributions: There were no changes made to these deductions.

Miscellaneous Deductions: The new tax law eliminates this entire category of itemized deductions. This means that the following deductions are no longer allowed:

  • Union dues
  • Unreimbursed business employee expenses
  • Investment expenses
  • IRA custodial fees
  • Tax Preparation fees
  • Job to job travel
  • And so on

Casualty Losses: Casualty losses are no longer deductible, except for losses incurred in federal declared disaster areas.


What were some of the other changes to the tax code for 2018?

Alimony Payments: For 2018 the law remains the same. Payments of alimony or maintenance payments are tax deductible by the payor and are includable in the income of the payee. However, either of these payments required by a divorce decree or separation agreement signed on or after January 1, 2019 will no longer be deductible by the payor, nor reportable as income by the payee.

Child Tax Credit: The child tax credit is still available for each child under the age of 17. However, the credit doubles from $1,000.00 to $2,000.00 per child. In addition, up to $1,400.00 of this credit is refundable. In addition there is now a nonrefundable credit of $500.00 per dependents other than a qualifying child.

Moving Expenses: All moving expenses are no longer allowed as a deduction against gross income, with the exception of moving expenses incurred by members of the military.

Kiddie Tax: Children who have investment income will no longer be taxed at their parent's tax rates. They instead will be taxed at the rates applicable to estates and trusts. The tax brackets are much smaller and therefore the tax liability may be substantially higher.

Tax tip: If your child has a substantial amount of investment income (interest, dividends and capital gains) you should contact us to discuss the potential ramifications for 2018.

Deduction for income from pass through entities The new tax law has created a new deduction to be used in calculating taxable income. This deduction is for qualified pass through entities. These are Sub-Chapter S corporations, partnerships, limited liability companies, sole proprietors and in some cases individually owned rental properties. If your taxable income is under $315,000.00 for MFJ returns or $157,500.00 for all others then you would be entitled to a deduction of 20% of the entity's taxable income. Above those taxable amounts there are many other factors that come into play in calculating the deduction. If you believe that this may apply to your tax situation it is important that you contact us to discuss this deduction further.


When must I start taking distributions from my IRA Accounts?

Annual required minimum distributions (RMDs) from traditional IRAs, SIMPLE IRAs and SEP IRAs must begin starting the year the taxpayer reaches age 70 and 1/2. Taxpayers can delay receipt of the first distribution until as late as the requred beginning date, which is April 1 of the year following the year they turn 70 and 1/2. Thereafter, the RMD for each year must be made by December 31. If the first distribution is delayed until April 1 of the following year, the second distribution must be made by December 31 of that year.

How do I calculate the amount?

The RMD for each calendar year is the account balance on December 31 of the preceding year divided by the distribution period from the Uniform Lifetime Table (below) for the owner's age at the end of the distribution year. Note: The RMD rules do not apply to Roth IRAs. Distributions from Roth IRAs are required only after the death of the participant.


Who may deduct student loan interest? Are there any income limitations to claiming this deduction?

Taxpayers can deduct up to $2500 of interest paid on qualified education loans for college or vocational school expenses as an adjustment to income (above-the-line) (IRC Sec221). The deduction is available for interest on qualifying loans for the benefit of the taxpayer or the taxpayer's spouse or dependent at the time that the debt was incurred.

Limitations: For 2018, the deduction is phased out when modified AGI is between $65,000 and $80,000 ($135,000 and $165,000 MFJ). Modified AGI is AGI (before the student loan interest deduction) increased by: 1) Foreign earned income or housing, 2) Foreign housing deduction, 3) Income from certain U.S. possessions or Puerto Rico, 4) Domestic production activities deduction and 5) Tuition and fees deduction.


Who may claim the two education credits available to taxpayers?

The education credits are available for qualified tuition and/or related expenses of the taxpayer, the taxpayer's spouse or a dependent of the taxpayer claimed on the taxpayer's return. They are not available to married taxpayers who file as married filing separately, or dependent claimed on another person's return. If a parent claims a child as a dependent, only that parent may claim the education credit for the child. If the parent is eligible to, but does not claim the student as a dependent, only the student can claim the education credit.

Qualifying expenses paid by a student are considered to have been paid by the parent if the student is claimed as a dependent on the parent's tax return. Likewise, if the student is not claimed as a dependent, qualifying expenses paid by parent can be claimed by the child. Strategy: It may be advantageous for parents who do not qualify for th education credit for their child's expenses due to the AGI limitation to not claim the child as a dependent, so the child (student) can claim the education credit on his return. This also applies to parents who would not benefit from claiming the exemption because they are subject to AMT. When parents forgo claiming the exemption for a child who qualifies as their dependent, no one claims the dependency exemption.


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Weinstein & Wohlafka CPAs, P.C.

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