Major Tax Reform for Federal Tax Returns for 2018
Your Tax Preparer
January 5, 2019
The Tax Cuts and Job Act (TCJA) is the most sweeping change in federal tax law since 1986. It contains more than 115 new provisions. I will list a few of them now.
The federal standard deduction for Married filing a joint return has increased from $12,700 to $24, 000; Head of Household increased from $9,350 to $18,000; Single from $6,350 to $12,000; and married filing separately from $6,350 to $12,000. Those who have itemized in the past may still have to keep track of deductions for the State of California.
In exchange for increasing the standard deduction, the TCJA suspends the personal exemption deduction. Dependent deductions are replaced with credits. The previous law allowed a dependent deduction of $4,150 per dependent. The TCJA has eliminated this deduction. Although the deduction for exemptions is repealed, the definition of a dependent was not changed. So, for example, eligibility for the Child Tax Credit hinges on whether the taxpayer may claim a qualifying child as a credit. Under the TCJA, a taxpayer that can claim a "qualifying child" as a dependent is eligible for a $2,000 Child Tax Credit. A taxpayer that can claim a "qualifying relative" as a dependent is eligible for a new $500 tax credit.
For 2018, according to the TCJA, in order to deduct medical costs and health insurance as an itemized deduction, your medical expenses must exceed 7.5 percent of your adjusted gross income. If you think your 2018 medical expenses exceed this threshold, take the time to assemble and add up your medical costs. If you are sure your medical expenses are below the percentage of income levels, there will be no benefit in adding up your medical expenses. If you are self-employed, we will need to know the amount you paid for medical insurance, since you can deduct those expenses even if they are below the percentage of income limits.
Penalty of not having health insurance
The penalty still applies for the 2018 tax year for not having health insurance. This means taxpayers without health insurance will continue to be subject to the $695 penalty. Tax preparers are still required to report all health coverage information on the individual 2018 tax return.
Under the TCJA, the amount of itemized taxes are limited. Taxpayers may claim an itemized deduction of up to $10,000 ($5,000 in case of taxpayers filing separately) for the aggregate of state and local income taxes and property taxes. As before, a taxpayer may make an election to deduct sales tax and use tax (also limited to the $10,000 limit.) State and local taxes and property taxes paid in carrying on a trade or business, a rental activity remain fully deductible.
If you are paying mortgage interest you will receive a Form 1098 which states the interest you have paid on your mortgage in 2018. Please furnish us with that information, as the IRS is checking the deductions you claim with their records. If you refinanced your mortgage, furnish us with refinancing closing statements, and information as to how any money withdrawn was used, as we may have to report that on your tax return.
As in all prior years, all charitable donations reported on your tax return must have receipts to substantiate the deduction. If you made a donation over $250 you must have a properly dated letter from that charity acknowledging the donation, which clearly states that no goods or services were received in return for the contribution.
Miscellaneous itemized deductions
All miscellaneous deductions that were subject to the 2 percent floor are repealed under the TCJA.
The office of Moats & Hebebrand CPAs makes a concerted effort to stay on top of the changes in the tax laws so you don't have to. Let us prepare your 2018 tax returns so you know they are done right! We are also open all year to assist with tax planning and to take care of our customers.