Personal exemptions and standard deduction
In prior years, taxpayers could claim a personal exemption for themselves, their spouse and each dependent. Often, however, there was no tax savings from exemptions because they phased out as income increased or when AMT was triggered.In 2017, each exemption reduced taxable income up to $4,050.
The TCJA eliminates personal exemptions.
In addition, the standard deduction was increased.Taxpayers can either itemize deductions or take a standard deduction.In 2017 the standard deduction was $6,350 for singles, $9,350 for head of household filers, and $12,700 for married couples.The TCJA roughly doubles the standard deduction amounts: $12,000 for singles, $18,000 for head of households, and $24,000 for joint filers.
For some taxpayers, the increased standard deduction will compensate for the elimination of the exemptions, and perhaps even provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from the family tax credits.
Family tax credits
Tax credits are especially valuable because they reduce your income tax dollar-for-dollar, rather than just reducing the amount of income subject to tax like deductions do. Beginning in 2018, the TCJA doubles the child credit to $2,000 per child under age 17.
Furthermore, the TCJA also makes the child credit available to more families than in the past. Under the new law, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000.
The TCJA also includes, beginning in 2018, a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child or elderly parent).
Will the child tax credit make up for the loss of the personal deduction?In 2017, each dependent reduced the tax liability by $1,102 for a filer in the 25 percent marginal tax rate.
Above-the-line deductions are deductions you can take even if you don’t itemize. They’re subtracted from your income to determine your adjusted gross income (AGI).
1. Moving expenses. The deduction for work-related moving expenses is eliminated, except for active-duty members of the Armed Forces.
2. Alimony payments. For divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income.
With the TCJA’s near doubling of the standard deduction for 2018 and reduction of itemized deduction benefits overall, many taxpayers who’ve typically itemized may no longer benefit from itemizing.
Here’s a closer look at the TCJA changes to itemized deductions:
The AMT is a separate tax system that limits some deductions, disallows others and treats certain income items differently. The TCJA reduces the number of taxpayers who’ll have to pay the AMT
Under pre-TCJA law, when the kiddie tax applies, a child’s unearned income was taxed at the parents’ marginal rate. The kiddie tax generally applies to children age 18 or younger, as well as to full-time students age 19 to 23.
The TCJA makes the kiddie tax harsher by taxing a child’s unearned income according to the tax brackets used for trusts and estates.In many cases, children’s unearned income will be taxed at higher rates than their parents’ income.
New deduction for pass-through businesses
Under pre-TCJA law, net taxable income from pass-through business entities (such as sole proprietorships (Schedule C businesses), partnerships, and S corporations) was simply passed through to owners. It was then taxed at the owners’ rates. In other words, no special treatment applied to pass-through income.
For tax years beginning in 2018, the TCJA establishes a new deduction based on a noncorporate owner’s qualified business income (QBI). The deduction generally equals 20% of QBI, subject to restrictions that can apply at higher income levels.QBI includes rental income.
The QBI deduction isn’t allowed in calculating the owner’s AGI, but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction.
Your IRA Could Owe Income Taxes
In recent years, many investors have sought to include investments other than traditional stocks, bonds, and mutual funds in their IRAs. When these investments generate more than $1,000 of unrelated business income (UBI) in one year, the IRA needs to file a tax return (Form 990-T). An IRA is most likely to generate UBI when it owns an interest in a pass-through business entity such as a partnership or limited liability company. Master limited partnerships (MLPs) most often trip up IRA owners. The Wall Street Journal reported on a person with an interest in a MLP affiliated with Kinder Morgan, Inc.; he received a tax bill for $24,321 to be paid from his IRA (November 14-15, 2015, page B7).
Investments other than MLPs can also generate UBI.
Married couples often use a credit shelter trust to reduce estate taxes. This technique effectively allows couples to shelter twice the exemption amount from estate taxes ($11.18 million in 2018). Portability achieves a similar result without the credit shelter trust and should be considered in estate planning. Portability is especially advantageous when a couple has large retirement accounts or an expensive primary residence.
Portability was made permanent in 2013. To receive the benefits, an estate tax return (Form 706) must be filed in a timely fashion after the first spouse dies.
Foreign Financial Assets
The IRS has long required taxpayers to disclose information about foreign bank and investment accounts with value in excess of a threshold amount. Effective 2011, Congress expanded the disclosure requirements to include all foreign financial assets with value in excess of a threshold amount, regardless of whether they generate taxable income.
Failure to comply with these requirements can result in very significant penalties.
Anyone with assets outside the United States should be certain they are compliant. Persons who gamble online using Internet accounts may not realize this reporting requirement impacts them.
Rollovers as Business Start-Ups (ROBS)
These are arrangements in which a business owner uses his 401(k), IRA or other retirement funds to invest in his company. Promoters claim that this is a tax- and penalty-free use of retirement funds. However, most taxpayers do not realize the difficulty of staying in compliance with the rules. Entering into a prohibited transaction can result in the termination of the retirement account. If terminated, all monies would be considered a distribution and, if owner was less than 59½, subject to a 10% penalty. Some prohibited transactions are:
Same-Sex Marriage Ruling
The same-sex marriage ruling states that same-sex couples who are legally married are considered married for federal tax purposes, regardless of whether their state of residence recognizes same-sex marriage. In 2013 and all future years, legally married same-sex couples must file their federal income tax returns as married filing jointly (MFJ) or married filing separately (MFS).
Same-sex married couples may now enjoy all of the federal tax-related benefits previously available only to opposite-sex married couples. These benefits include (but are not limited to):
Same-sex married couples are also subject to the many marriage penalties included in the tax code.
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