2018 Tax Law Changes







Federal tax law has really changed in 2018.

In fact, the alterations to the Internal Revenue Code surpass anything seen since the mid-1980s.

The tax reform bill that became law – officially called H.R. 1, popularly called the Tax Cuts and Jobs Act – gives businesses and estates substantial tax breaks. It may make federal tax law simpler for many households; individuals, couples, and families could realize significant tax savings this year. 

Most of the tax reforms authorized by the passage of H.R. 1 will be in place through 2025. After 2025, some of the changes could be reversed or revoked. That will be up to Congress.1

Let’s look at the changes that may impact your household or business the most.

Individuals, couples, and families could see their income tax situation affected by ten major changes.

The seven income tax brackets have been revised.

The old brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%

The new brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.1

The personal exemption is gone, but the standard deduction has ballooned.

The enlarged standard deduction ($12,000 for individuals) more than offsets the previously scheduled $6,500 standard deduction + $4,150 personal exemption many taxpayers would have claimed for 2018.

The standard deduction is $18,000 for heads of household and $24,000 for joint filers.1

The federal estate tax exemption is twice what it was.

Estates are exempt from inheritance taxes if they are smaller than $11.2 million (individuals) and $22.4 million (married couples).1

The SALT deduction is capped at $10,000.

That is the new annual limit on the amount of state and local taxes you can deduct. In 2018, you may deduct a maximum of $10,000 of these types of taxes in combination. (You can either add up property taxes and state and local income taxes or property taxes and state and local sales taxes.) The $10,000 ceiling falls to just $5,000 for married taxpayers who file separately.2

The mortgage deduction now has an annual limit of $750,000.

If you secured a home loan on December 15, 2017 or thereafter, that is the new yearly limit (capped at just $375,000 for married taxpayers filing separately). If your home loan was originated before December 15, 2017, the old $1 million annual deduction limit still applies.2

The Child Tax Credit doubles to $2,000.

As much as $1,400 of the credit has been made refundable. Phase-out thresholds are much higher than they once were, so more families can qualify for the CTC.1

529 plan assets can now pay for qualified K-12 school expenses.

Before this year, you could only use them to pay for qualified college education expenses.2

The threshold for the medical expense deduction has fallen.

You can now deduct any out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income (AGI). The old deduction threshold was 10% of AGI.

This applies to qualified medical expenses in the 2017, 2018, and 2019 tax years.2

Most itemized deductions are gone, at least through 2025.

They include deductions for casualty and theft losses (unless in case of a federally declared disaster), unreimbursed employee expenses, subsidized employee parking and transit passes, unreimbursed travel and mileage for work, moving expenses, home equity loan interest, tax preparation fees, investment fees and expenses, and use of a home office.3,4

In 2019, the federal requirement to have health insurance is scheduled to disappear.

Since the passage of the Affordable Care Act, individual taxpayers have paid penalties for not having health coverage. The way it stands now, beginning in 2019, no taxpayer will be penalized for a lack of health insurance.1 

Businesses may benefit the most from the federal tax reforms.

The corporate tax rate is now a flat 21%.

Previously, earnings were taxed as much as 35%. This change is permanent.

In addition, the corporate AMT has been eliminated.1

LLCs, S-corps, and sole proprietorships can now deduct 20% of business income.

This break will help many of these pass-through business entities lower their taxable incomes. (It also applies for estates and trusts.)

Some doctors, lawyers, and professional services and consulting firms may make too much to take advantage of the full 20% deduction.2

Two other major business deductions have doubled.

The Section 179 deduction has risen permanently to $1 million, a perk for business owners who want to deduct the whole cost of an asset during its first year of use. The $1 million deduction limit is now inflation indexed.

A firm can now write off 100% of qualified property costs through 2022: bonus depreciation is now set at 100% with a 5-year limit. Bonus depreciation now also applies to used business equipment that is purchased, not just new equipment.5

1031 exchanges can now only be used for real estate.

Before 2018, businesses and business owners could trade what was defined as personal property (heavy equipment, vehicles, livestock, etc.) through like-kind exchanges. Now, only real property may be exchanged.5

Cost-of-Living Adjustments

We are starting to see a bit more inflation these days, and that has led to 2018 cost-of-living adjustments (COLAs) for contribution limits on retirement accounts and other accounts.

You can put $500 more in a 401(k), 403(b), or 457 plan this year

*The ceiling on elective deferrals to these plans rises to $18,500, with a $6,000 catch-up contribution permitted for those who will be 50 or older by the end of 2018 (so those 50 and older may contribute up to $24,500 this year).6

Annual Health Savings Account contribution limits also rise.

*The annual contribution limit for individuals increases $50 this year to $3,450, while the contribution limit for families rises $150 to $6,900. The individual contribution limit is $4,450 for those who will be 55 and older in 2018 and $7,900 for families headed by those who will be 55 and older this year.7

The Earned Income Credit increases slightly.

*This is a plus for larger families. For joint filers with three or more qualifying children, the EIC has a ceiling of $6,444, up $126 from 2017.8

The yearly gift tax exclusion increases.

*For 2018, it is $15,000, up from $14,000 in 2017.8

One account limit is notably unchanged – the annual limit on IRA contributions.

*The annual contribution limit for IRA owners is still $5,500 per year and $6,500 for those 50 and older.6

A change in the way COLAs are being calculated.

One under-the-radar change brought about by the tax reforms deserves more coverage. The I.R.S. will now make COLAs based on the Chained CPI.1

What is the Chained CPI? A slightly different version of the benchmark Consumer Price Index (CPI-U). For decades, increases to retirement plan contribution limits, tax brackets, and other federal tax thresholds have been determined by movement (or the lack thereof) in the CPI-U.1

The Chained CPI tends to rise (or fall) in slightly smaller increments than the CPI-U. That implies slightly smaller COLAs.1

The Chained CPI is not yet being used to determine Social Security COLAs. Some analysts believe it might be used that way in the future.

Who or what entities stand to realize significant benefits?

Businesses are poised to reap sizable tax savings. The drop in the corporate tax rate will greatly benefit C-corps, and the new 20% deduction permitted for most pass-through firms effectively means that many small businesses will be paying tax on 80% of their revenues.9

Some households will, while others may not. Most taxpayers will see reduced income tax rates through 2025. Heirs will benefit from the jump in the estate tax threshold, which means fewer inheritances will be taxed at rates up to 40%. Families will see a larger Child Tax Credit, and parents and grandparents now have the chance to pay for both private school expenses and college expenses with 529 plan funds.1 

One of the goals of the tax reforms was simplification, and the elimination of many itemized deductions will make organizing 1040 forms easier for taxpayers and tax preparers. At the same time, their absence could be a negative for new homeowners, larger families, and people living in states with high property or income taxes, who may not realize the degree of federal tax breaks they did in the past. Charities and other non-profit groups may see reduced donations, at least from the middle class.

Andrew Dietz may be reached at 410-891-5700 or andrew@dietzglobal.com



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1 fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx [12/30/17]

2 investopedia.com/taxes/how-gop-tax-bill-affects-you/ [1/3/18]

3 forbes.com/sites/kellyphillipserb/2017/12/20/what-your-itemized-deductions-on-schedule-a-will-look-like-after-tax-reform/ [12/20/17]

4 usatoday.com/story/money/taxes/2017/12/26/these-9-tax-deductions-are-going-away-in-2018/108910040/ [12/26/17]

5 americanagriculturist.com/farm-policy/10-agricultural-improvements-new-tax-reform-bill [11/14/17]

6 irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions [11/29/17]

7 aol.com/article/finance/2017/12/28/3-bold-ways-retirees-can-cut-health-care-costs-in-2018/23318979/ [12/28/17]

8 irs.gov/newsroom/in-2018-some-tax-benefits-increase-slightly-due-to-inflation-adjustments-others-unchanged [10/19/17]

9 kiplinger.com/article/taxes/T055-C032-S014-winners-and-losers-in-the-new-tax-law.html [12/27/17]