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.

Tax Credits and Tax Deductions

I have noticed confusion in the people I talk to regarding tax credits and tax deductions. A tax deduction reduces the amount of income that is subject to tax. Examples include the itemized deductions for mortgage interest, real estate taxes, contributions, etc. If you earn $80,000 but have $25,000 in itemized deductions, you pay tax on $55,000 of income. If you are in a 12 percent federal tax bracket, a $25,000 tax deduction reduces your tax $3,000 ($25,000 x 12 percent tax rate). A tax credit reduces your tax by the amount of the credit. A $2,000 child tax credit reduces the tax by $2,000. Hence tax credits are worth much more than tax deductions. A brief summary of tax credits follows:

Child Tax Credit – applies to children under age 17. The child must be related to, live with and be a dependent of the taxpayer who provides greater than 50 percent of their support. The $2,000 per child tax credit is reduced as the taxpayer's income exceeds certain thresholds.

Child & Dependent Care Credit – This credit is 20-35 percent of the smallest of $3,000 or the amount spent to provide dependent care for one individual ($6,000 for two or more individuals) to allow the taxpayer (if married a joint return must be filed) to work or look for work. A qualified child/dependent must be under 13 years of age at the close of the tax year (unless the individual is disabled and is a dependent or spouse who lived with the taxpayer more than half the year). The 35 percent credit rate reduces to 20 percent as income exceeds certain thresholds.

Adoption Credit – A tax credit equal to $13,810 may be taken for qualified expenses paid in 2018 (adoption fees, attorney fees, court costs, travel expenses) to adopt a child under age 18, or disabled physically or mentally incapable of self care. Interestingly, the credit can still be claimed for expenses to adopt a U.S. citizen or resident child even if the adoption never becomes final. The credit cannot be claimed for a foreign child unless the adoption becomes final. The credit is not refundable. If the credit exceeds tax owed, the unused credit can be carried forward up to 5 years. California allows a tax credit of 50 percent of the adoption expense once the adoption is final.

Earned Income Credit – The Earned Income Credit is refundable for taxpayers with earned income (wages, combat pay, disability pay reported on form W-2 and self-employment income) below certain income threshold amounts. Taxpayers with more than $3,500 of investment income (interest earned, dividends earned, capital gains, royalty income and rental income) do not qualify. The requirements to receive the credit are stringent, but since the credit is refundable (credits in excess of tax owed are paid to the taxpayer as a tax refund) it is worth looking at. This credit has been abused in the past and the IRS looks at it closely, so don't claim it if you are not entitled to it.

Nonbusiness Energy Property Credit – This is a credit for energy efficient doors, windows, insulation, heating, air conditioning, stoves and water heaters installed on your principal residence. This credit no longer exists for tax years after 2017.

Residential Energy Efficient Property Credit – this credit applies to solar and wind power property and geothermal heat pumps and is equal to 30 percent of the cost of eligible property (there is no maximum credit). A taxpayer can rely on the manufacturer's certification that the property qualifies for the credit. The credit does not apply to swimming pools/hot tubs.

Retirement Savings Contribution Credit – Provides for a credit of 10-50 percent of contributions to IRA's and retirement plans up to a maximum credit of $1,000 ($2,000 for married filing jointly). The credit reduces as your income increases and disappears at $63,000 filing jointly, $47,250 for head of household and $31,500 for singles or married filing separately. The credit does not apply if you were born after Jan 1, 2001, were a student any part of five months in 2018, or were claimed as a dependent by another taxpayer. There are many other credits available. Hopefully some of these credits can reduce your 2018 taxes.

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.