As the IRS returns to work and opens the tax filing season, we think it is important to outline the major changes that individual taxpayers will face this year. Since this is the first year of tax reform, here is what you should know.
- Increased standard deduction.
Tax reform shepherds in a new structure for individual taxpayers in the form of an enhanced standard deduction. Congress increased the standard deduction for married couples to $24,000 while single taxpayers will be $12,000 and $18,000 for head of households. This increased amount, along with the changes to itemized deductions outlined below, will significantly reduce the number of taxpayers that will be able to itemize their deductions.
- Changes to itemized deductions.
The basics of itemized deductions remain the same except for a couple of high impact areas. First, the deduction for state and local taxes (this includes state income taxes, property taxes and the like) will be limited to $10,000. Second, miscellaneous itemized deductions, which has been a high abuse area in the past, is completely eliminated. Miscellaneous itemized deductions include tax preparation fees, investment advisory fees, unreimbursed employee expenses, job search expenses and a variety of similar expenses.
- Caution to moving unreimbursed employee expenses.
These expenses are those related to expenses you incur as an employee (i.e. mileage) which are not reimbursed by your employer. Historically, these expenses, subject to limitations, were deductible. Unfortunately, due to the nature of these expenses there has been a lot of abuse and deducting of fictitious or inflated amounts. Tax reform has eliminated these amounts from being deductible starting with the 2018 tax year. The IRS is aware that some taxpayers may move these expenses to other areas of their returns to try to circumvent the new law. We anticipate the IRS to target those taxpayers and prepares.
- No more personal exemption.
The concept of personal exemptions has been eliminated from the law. Historically, we received a deduction for the number of people in our household. Starting with the 2018 tax year, no such deduction will be allowed. Instead you will receive a $2,000 tax credit for dependent children under the age 18 and $500 for all other dependents. This is a tax credit, which means that it reduces the amount of tax you owe directly. This amount phases out once adjusted gross income hits $400,000 for married couples and $200,000 for unmarried taxpayers.
- Qualified business income deduction.
This is probably the biggest change to the new tax law. This law is continuing to emerge and there are still considerable open unanswered questions, even after the final regulations issued earlier this month. Basically, any “trade or business” will receive a deduction of 20% of its net income. This deduction is available to any taxpayer with this type of income if taxable income is below $315,000 for married couples or $157,500 for all other taxpayers. There are significant limitations and rules which apply once your income exceeds this amount.
There are significant other changes but most taxpayers will be effected by the above items. If you have any questions about the impact of the new law on your specific situation, please do not hesitate to contact us.