The Tax Cuts and Jobs Act (TCJA) was passed on December 20, 2017. It amended the Internal Revenue Code of 1986. Many of these changes will be in effect until December 31, 2025 unless extended by Congress.
Listed below is an overview of some of the changes in the new tax law:
- The 2018 draft form of the IRS Form 1040, U.S. Individual Income Tax Return,
has been reduced to two half-pages. The first page gathers information about the taxpayer and any dependents and for the taxpayers signature. The second page gathers information on the taxpayer’s income, deductions (including a new line for the Sec. 199A deduction (known as the Qualified Business Income deduction), credits, and taxes paid. (The Section 199A deduction will be discussed in Part 2 of this article at a later date…watch for it…you won’t want to miss it.)
- Many of the items reported on the former 2017 version of the IRS Form 1040 will
be broken out into 6 separate schedules (here we go again with more pages added to a seemingly endless paperback book tax return). In summary, the former 2-page IRS Form 1040 will now be comprised of 7 pages. The new Schedules are as follows:
- Schedule 1, Additional Income and Adjustments to Income, includes items from lines 10 through 37 of the 2017 Form 1040, such as taxable refunds, business income, capital gains or losses, and adjustments including health savings account deduction, self-employed health insurance deduction, and student loan interest expense.
- Schedule 2, Tax, includes items from lines 44 through 47 of the 2017 Form 1040, such as the alternative minimum tax, and any excess premium tax credit that must be repaid.
- Schedule 3, Nonrefundable Credits, includes items from lines 48 through 55 of the 2017 Form 1040, such as the credit for child and dependent care expenses, education credits, retirement savings contributions credit, and the residential energy credit.
- Schedule 4, Other Taxes, includes items from lines 57 through 63 of the 2017 Form 1040, such as the self-employment tax, additional tax on IRA’s, household employment taxes, repayment of first-time homebuyer credit, and the health care individual responsibility tax.
- Schedule 5, Other Payments and Refundable Credits, includes items from lines 65 through 74 of the 2017 Form 1040, such as estimated tax payments, the net premium tax credit, and amounts paid with an extension request.
- Schedule 6, Foreign Address and Third Party Designee, provides taxpayers who have a foreign address a place to list their country, province, and postal code (formerly these appeared on page 1 of the 1040) and provides all taxpayers with a place to list information for a third-party designee who can discuss the return with the IRS.
- The new tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. They will phase out in eight years. They replace the old tax rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
- The Standard Deduction Doubles: The standard deduction increased as follows:
- For Single & Married Filing Separately it increased from $6,350 to $12,000.
- For Married Filing Jointly and Widows it increased from $12,700 to $24,000.
- For Heads of Household it increased from $9,350 to $18,000.
- The Personal Tax Exemption is eliminated. In 2017 it was $4,050 per person.
- The Child Tax Credit is increased from $1,000 to $2,000 per child (first $1,400 is refundable if the qualifying child is under the age of 17).
Before we move on to the next section let’s take a closer look at the new standard deduction and the elimination of the personal tax exemption to see how that is going to work out.
For the Single individuals: In 2017 their standard deduction and personal exemption combined would have totaled $10,400. In 2018 their new standard deduction is $12,000. That is an increase of $1,600 in deductions.
For Heads of Household with one child: In 2017 their standard deduction and personal exemption would have totaled $17,450. In 2018 their new standard deduction is $18,000. That is an increase of $550 in deductions.
For Married couples with no children: In 2017 their standard deduction and personal exemption combined would have totaled $20,800. In 2018 their new standard deduction is $24,000. That is an increase of $3,200 deductions.
First place goes to…married couples with no children. Second place goes to…single individuals. Last place goes to…Heads of Household with one child!!
One can only hope that the single Mother (or Father) can at least qualify for the Earned Income Credit and the Additional Child Tax Credit, and any other credit available to boost their tax refund to make it through another year. (That is just my biased opinion as a single mother.)
FORM 1040-SCHEDULE A
- Medical and Dental Expense Tax Deduction Rate is reduced in 2017 and 2018 from 10% to 7.5%. It will rise back to 10% in 2019. You have until the end of 2018 to pack in as many visits to the doctor, dentist, chiropractor, acupuncturist, etc. as humanly possible.
- The Mortgage Interest Deduction is capped at $750,000 for loans taken out after December 15, 2017 and you can only deduct home mortgage interest to the extent that the loan proceeds were used to buy, build, or substantially improve the home securing the loan. Second mortgages used to pay down credit card debt or to fund a vacation, etc. do not qualify for the deduction.
Home mortgages taken out on or before December 31, 2017 is capped at $1,000,000 and the new rule applies that second mortgages used to pay down credit card debt or to fund a vacation, etc. do not qualify for the deduction.
- The State and Local Property Tax Deduction is capped at $10,000.
- The Miscellaneous Itemized Deductions Subject to the 2% AGI floor is eliminated for eight years.
- The Moving Expenses Deduction is eliminated. (With the exception of members of the military.) This will expire in 2025.
- The Tax Deduction for Casualty and Theft Loss is eliminated (except for those losses attributable to a federal disaster as declared by the President) from 2018 to 2025.
- The Tax Return Preparation Expense Deduction is eliminated.
- The Home Office Deduction for Employees is eliminated, including the Business Mileage Rates for Un-Reimbursed Employee Travel Expenses.
(This has nothing to do with the Home Office Deduction for Self-Employed Taxpayers. That deduction is still in effect on Form 8829, Expenses for Business Use of Your Home.)
There are several more changes, that can not all be covered in this article due to space (and time) limitations. Individuals with capital gains will need to refer to the new Tax Form Instructions and/or their Tax Return Preparer.
For more information on the newly revised draft Tax Forms please click on the link below if you are a geek for hard evidence like me (Tip: to put the forms in numerical order click on the Product Number heading):
If I haven’t lost you yet…please stay tuned for Part 2 when it is published. Small business owners will not want to miss it!