2018 Tax Return

Tax Cuts and Jobs Act of 2017 (aka TCJA)

For the first time since 1986, there are major changes to almost every nook and cranny of the federal income tax code.  For those of you keeping track, that's basically the length of my entire career. Most of the policies within this 1,101 page tome went into effect January 1, 2018. And, important to note, almost all expire in 2026 other than the effects on corporate income taxes, which were permanent.

Here are my key points of changes that effect the greatest number of individual taxpayers:

  • Elimination of dependent exemptions
  • Increase to standard deduction
  • Increase to child tax credit; increase in phaseout due to high income
  • Reduction of 15% tax bracket to 12%
  • Reduction of 25% tax bracket to 22%
  • Reduction of 28% tax bracket to 24%
  • Reduction of 22% tax bracket to 32%
  • Reduction of 39.6% tax bracket to 37%
  • Changes in amount of income that falls within these brackets (varies on impact being in our favor or not)
  • Itemized deductions for state and local taxes (aka "SALT") capped at $10,000
  • Elimination of itemized deductions in the "miscellaneous" category, formerly subject to 2%
  • Increase to exemption before alternative minimum taxes apply (so fewer people will pay this tax)

There are many other changes; we hope since it's an 1,100 page document!  Some of these changes effect estates & trust, corporations, nonprofits and others aren't related to income taxes at all (i.e. Arctic National Wildlife Refuge drilling).

For those of you who have been itemizing (if you're not sure, check page 2 of your 2017 1040, line 40, if this isn't the standard deduction amount for your filing status, then yes, you itemize), you may find for 2018 and beyond, you will NOT be.  If you're married, your former standard deduction was $12,700; 2018 is $24,000. If your itemized deductions were not more than $24,000, then it's unlikely you will itemize in the future.  Now, if it's important to you that you itemize as, for example, you have significant charitable donations, then you might consider changing your giving.  In 2018, you might consider making large enough donations that you are able to itemize, then in 2019 drop your donations to a more minimal level. Then in 2020, bulk up the donations again; repeat that cycle every other year.  

If you're taking taxable withdrawals from your retirement AND make charitable donations, you will be more likely to get a positive tax effect by asking your retirement plan to direct the donation for you. This is referred to as a qualified charitable distribution or QCD. This would be relevant from an IRA or 401(k), but not a pension plan nor a Roth.  For some retired folk, they are taking require minimum distributions because they have to (aka RMD), but otherwise don't need the money. The QCD would be a fabulous idea for them!

I'll cover more of the above bullet points in future editions............. stay tuned!