2018 taxes will be “interesting.” There are, as I’m sure you know, a great number of changes in the federal tax code.
The following deductions no longer exist:
- Personal exemptions
- Dependent exemptions
- Moving costs (unless you are active U.S. military)
- Interest on home equity debt (this is a big deal and may be a big headache – more later)
- Casualty and theft losses unless they occurred in a federally declared disaster
- Union dues and all other expenses related to your employment
- Investment fees (previously deductible in certain circumstances)
- Attorney’s fees
Also note that state income taxes, property taxes and DMV fees in total are capped at $10,000. The silver lining is that most people will not be subject to the Alternative Minimum Tax any longer.
Keep in mind that California does not comply with any of this. These deductions will still count on your California return.
To offset the lower deductions, the standard deduction has been doubled. Which means many people will use the standard deduction on their federal return and itemize on their California return. Also the marginal tax rates are lower, by three to four percent. The fifteen percent bracket is now twelve, and the twenty-five percent bracket is now twenty-two percent.
Dependent credits have doubled to $2,000. And there is a $500 credit for non-child dependents.
There is a new kind of income called “Qualified Business Income.” This will be used to generate a credit and is subject to many rules, many of which are not well defined. It is not clear if residential rental real estate income qualifies. The credit phases out at higher income levels – starting at $315,000 for married couples. Certain services, like, for example, accountants, do not qualify for the credit above certain income levels. If you are a sole proprietor, own an S-Corp, or LLC or are part of a partnership, or receive REIT dividends, you may have Qualified Business Income. This is to level the playing field with C-corporations which now have a flat tax rate of 21%
The 1040 is now a “postcard.” In order to shrink the size of the 1040, there are six new forms that feed into it.
IRS has still not come up with a new W-4, and there is a general concern that taxpayers were not withholding enough in 2018. I don’t really know. We shall see and then make adjustments for 2019 if necessary.
Line 8 of Schedule A states: “If you didn’t use all of your home mortgage loan(s) to buy, build, or improve your home, check this box.” Before, you could use up to $100,000 for whatever you wanted and still deduct the interest. No longer. Even if you merely refinanced your mortgage, the fees of the refinance usually get rolled into the new loan. That part will not be deductible. Please try to ascertain how much home equity debt you have. It can be tricky with old loans and multiple refinancing. The number on your 1098 is total interest and will not break down acquisition vs. equity debt. The IRS will be checking the 1098 total against what you report on Schedule A. For many people this won’t be an issue because you will be taking the new, higher standard deduction. California, of course, will be using the old rules, so you will still be able to deduct equity debt on your California return.
Mortgages initiated after December 15, 2017 are now limited to $750,000. Thus if you have a million dollar mortgage, only 75% of the mortgage interest will be deductible. Older mortgages are grandfathered at the old limit of $1,000,000.
You can now use 529 plans to fund K-12 private schools.
Penalties associated with the Affordable Care Act are still in place for 2018, but are scheduled to expire after that.
Estate taxes now kick in at estates (assuming a married couple) valued at over $22,360,000.
New divorce rules for 2019: for payments required under divorce or separation instruments that are executed after Dec. 31, 2018, the new law eliminates the deduction for alimony payments.
One last thing to note is that all of these federal changes are set to expire in 2026 and revert back to the 2017 law (except the C-corporation tax rate change which is permanent.)
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None of the information in this document should be considered as tax advice. You should consult your tax advisor for information concerning your individual situation. Tax services are not offered through, or supervised by, The Lincoln Investment Companies.