Tax Changes’ Effect on Your 1040

As we approach the end of 2018, it is time to review your tax situation. It can be substantially different than it was in 2017 thanks to the Tax Cut and Job Act of 2017 (TCJA). The aspects of this law will have an impact on most taxpayers.

First, let’s take a look at some of the most basic provisions of the law:

1. The maximum tax rate decreases from 39.6 percent in 2017 percent to 37 percent in 2018.

2. The standard deduction increases from $6,350 in 2017 to $12,000 in 2018 for single taxpayers and from $12,700 in 2017 to $24,000 in 2018 for married filing jointly.

3. The personal and dependency exemptions have been eliminated in 2018.

4. The child credit for a child under 17 has increased from $1,000 in 2017 to $2,000 in 2018. In addition, in 2018, the amount of the credit does not start to phase out until adjusted gross income reaches $400,000 for married filing jointly taxpayers and $200,000 for all others. In 2017, the credit began to phase out at $110,000 for married filing jointly taxpayers, $55,000 for married filing separately taxpayers, and $75,000 for all other taxpayers. This will result in many more taxpayers being eligible for this credit.

5. Itemized deduction changes

6. The total amount of all (income tax, real estate tax, and sales tax) state and local income taxes (SALT) is limited to $10,000.

7. Mortgage interest is still deductible. However, interest is only deductible on the first $750,000 of mortgage debt for new loans after December 15, 2017. Mortgages currently in force are grandfathered in and interest is deductible up to $1,000,000 of debt.

8. Miscellaneous itemized deductions such as investment fees, safety deposit box rental, accounting fees, and non-reimbursed employee business expenses are no longer deductible.

9. Medical expenses remain deductible for all out of pocket expenses in excess of 7.5 percent of adjusted gross income.​

If you have filed your tax return itemizing deductions on schedule A in the past, there is a possibility that you will get a better result using the standard deduction in 2018. For a quick check, take your mortgage interest and add $10,000 for SALT, then add your charitable contributions, then add deductible medical expenses. If this amount is less than $12,000 for single filers or $24,000 for married filing joint, then you will use the standard deduction.

Using the standard deduction makes record keeping much easier as you will not need receipts for charitable contributions and miscellaneous expenses. However, as your tax preparer, you will still need to provide us with a copy of your real estate tax bill in order to file your Illinois tax return and obtain the state level tax credit.

Other provisions of the law include:

1. Net operating losses (NOL) can no longer be carried back. All NOL’s can be carried forward 20 years. Also, application of the NOL deduction in a subsequent profitable year is limited to 80 percent of taxable income calculated without regard to the NOL deduction.

2. Alimony will not be deductible to the payer or included in the income of the recipient for divorce or separation agreements executed or amended after December 31, 2018.

3. The alternative minimum tax (AMT) exemption has increased from $54,300 to $70,300 single filers and from $84,500 to $109,400 for married filing joint taxpayers. The other big change in AMT is the phase out amount increased to $500,000 from $120,700 for single taxpayers and increased to $1,000,000 from $160,900 for married taxpayers. This change will subject fewer taxpayers to the AMT in 2018.

Remember that everyone’s individual tax situation is different. Please contact our office to discuss the implications of the tax changes on your individual income tax situation.

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About the Author - Mark Neeb, Manager, CPA, ECS Financial Services, joined the firm in 2014 and has over 20 years of experience in public accounting. Mr. Neeb's areas of expertise include business and individual income tax, tax planning, real estate accounting, as well as review and compilation engagements, and financial statement preparation. Mr. Neeb is a licensed CPA in the state of Illinois and holds a Master of Science in Taxation degree from DePaul University, and a Bachelor of Business Administration degree from the University of Wisconsin - Eau Claire.