The new tax reform bill has been passed and it will affect most of the population when filing your 2018 taxes. Reduced tax rates, higher standard deductions, and higher child tax credits for families are just a few of the perks that individual taxpayers will see next year.
However to pay for these tax breaks, lawmakers took away many deductions that millions of taxpayers had used every year to reduce their tax bills. The nine deductions discussed are just some of the popular provisions that will disappear, and taxpayers will have to look closely at their own personal situations to see whether other, less common deductions are also going away.
The 2018 tax brackets
Standard deduction and personal exemption
While it's being sold as a tax cut, the higher standard deduction really falls more under the category of a simplification.
Yes, the standard deduction has roughly doubled for all filers, but the valuable personal exemption has been eliminated. For example, a single filer would have been entitled to a $6,500 standard deduction and a $4,150 personal exemption in 2018, for a total of $10,650 in income exclusions. Under the new tax plan, they would just get a $12,000 standard deduction.
Having said that, here's a comparison between the standard deductions of the new and old tax laws.
Capital gains taxes
The general structure of the capital gains tax system, which applies to things like stock sales and sales of other appreciated assets, isn't changing. However, there are still a few important points to know.
For starters, short-term capital gains are still taxed as ordinary income. Since the tax brackets applied to ordinary income have changed significantly, as you can see from the charts above, your short-term gains are likely taxed at a different rate than they formerly were.
Also, under the new tax law, the three capital gains income thresholds don't match up perfectly with the tax brackets. Under previous tax law, a 0% long-term capital gains tax rate applied to individuals in the two lowest marginal tax brackets, a 15% rate applied to the next four, and a 20% capital gains tax rate applied to the top tax bracket.
Instead of this type of structure, the long-term capital gains tax rate income thresholds are similar to where they would have been under the old tax law. For 2018, they are applied to maximum taxable income levels as follows:
Finally, the 3.8% net investment income tax that applied to high earners remains the same and with the exact same income thresholds. If Congress is successful in repealing the Affordable Care Act, this could potentially go away, but it remains for the time being.
Tax breaks for parents
I mentioned earlier that the personal exemption is going away, which could affect larger families.
However, this loss and more should be made up for by the expanded Child Tax Credit, which is available for qualified children under age 17. Specifically, the bill doubles the credit from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400.
In addition, the phase-out threshold for the credit is dramatically increasing.
If your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.
Furthermore, the Child and Dependent Care Credit, which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable.
Education tax breaks
The Lifetime Learning Credit and Student Loan Interest Deduction are still in place, and the exclusion for graduate school tuition waivers survives as well.
One significant change is that the bill expands the available use of funds saved in a 529 college savings plan to include levels of education other than college. In other words, if you have children in private school, or you pay for tutoring for your child in the K-12 grade levels, you can use the money in your account for these expenses.
Mortgage interest, charitable contributions, and medical expenses
These three deductions remain, but there have been slight tweaks made to each.
- First, the mortgage interest deduction can only be taken on mortgage debt of up to $750,000, down from $1 million currently. This only applies to mortgages taken after Dec. 15, 2017, preexisting mortgages are grandfathered in. And the interest on home equity debt can no longer be deducted at all, whereas up to $100,000 in home equity debt could be considered.
- Next, the charitable contribution deduction is almost the same, but with two notable changes. First, taxpayers can deduct donations of as much as 60% of their income, up from a 50% cap. And donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.
- Finally, the threshold for the medical expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. In other words, if your adjusted gross income is $50,000, you can now deduct any unreimbursed medical expenses over $3,750, not $5,000 as set by prior tax law. Unlike most other provisions in the bill, this is retroactive to the 2017 tax year.
The SALT deduction
Perhaps the most controversial aspect of tax reform on the individual side was the fate of the state and local taxes deduction (SALT). The final version of the bill keeps the deduction, but limits the total deductible amount to $10,000, including income, sales, and property taxes.
Deductions that are disappearing
While many deductions are remaining under the new tax law, there are several that didn't survive, in addition to those already mentioned elsewhere in this guide. Gone for the 2018 tax year are the deductions for:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Other miscellaneous deductions previously subject to the 2% AGI cap
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
2018: Important Tax Facts for Investors
Qualified Dividend and Long-Term Capital Gains Rates: Three rates are still in place for dividends and long-term capital gains--0%, 15% and 20%--but they don't map perfectly by tax bracket as they did in the past. Here are the parameters for each of the rates.
- 0%: Single taxpayers with incomes between $0 and $38,600; married couples filing jointly with incomes between $0 and $77,200.
- 15%: Single taxpayers with incomes between $38,600 and $425,800; married couples filing jointly with incomes between $77,200 and $479,000.
- 20%: Single taxpayers with incomes over $425,800; married couples filing jointly with incomes over $479,000.
2018: Important Tax Dates to Remember
January 1
New IRA, retirement plan, and HSA contribution and income limits went into effect for 2018 tax year, as listed above.
January 16
Estimated tax payments due for fourth quarter of 2017.
April 17
- Individual tax returns (or extension request forms) due for 2017 tax year.
- Estimated tax payments due for first quarter of 2018.
- Last day to contribute to IRA for 2017 tax year (2017 contribution limits: $5,500 under age 55; $6,500 for age 55 and above).
- Last day to contribute to health savings account for 2017 tax year (2017 contribution limits: $3,400 for single coverage, contributor under age 55; $4,400 for single coverage, contributor age 55 and above; $6,750 for family coverage, contributor under age 55; $7,750 for family coverage, contributor age 55 and above).