Your 2018 tax return will be nothing like you’re accustomed to. The tax form is new, and changes made by the Tax Cuts and Jobs Act will significantly alter what you may and cannot deduct.
1. New Tax Form
When you submit your 2018 tax return, you will use a newly designed Form 1040. (not quite the size of a postcard but pretty close).Forms 1040A and 1040-EZ are no longer available. The new 1040, which is used by all filers, is a two-page document that primarily summarizes income, deductions, and credits. These things are detailed in new schedules 1–6.
But don’t be discouraged if you have a new form and timetable. The vast majority of taxpayers (about 80%) utilize software to file electronically (called as E-filing) or paid preparers to finish their forms. If this describes you, all you need to do is submit the relevant information; don’t worry about where it belongs on the form or timetables.
2. Lower Tax Rates
While there are still seven tax bands, they have been decreased in number. For example, the highest tax rate has been reduced to 37% (from 39.6%). Overall, this implies that many people will have a smaller tax burden. It will not, however, benefit everyone. Consider the following: The previous upper limit for the 28% tax rate was $191,650 for a single filer. Such 28% bracket is no longer available, and a single filer with that income is now in the 32% bracket.
In terms of investment income, the rates for long-term capital gains and qualifying dividends remain constant. The breakpoints at which the zero-rate, 15%, and 20% rates apply, however, have been somewhat adjusted.
3. Higher Standard Deduction Amount
When you submit your tax return, you may still choose to take the standard deduction or itemize your personal deductions. The standard deduction numbers for 2018 are almost twice those of 2017: $24,000 for joint filers and surviving spouses, $18,000 for heads of households, and $12,000 for individuals and married couples filing separately.
This increased standard deduction number means you’re less likely to itemize (it’s anticipated that under the new tax code, just 10% of filers would itemize, down from 30% before). This makes recordkeeping easier.
Furthermore, the larger standard deduction amounts influence whether or not you are obliged to file a tax return, since there are now higher filing thresholds reflecting these greater standard deduction amounts.
4. No Personal and Dependency Exemptions
Previously, you could claim exemptions for yourself (and your spouse), as well as your children and other dependents ($4,050 per exemption in 2017). No more. Exemptions have been deleted for 2018 (through 2025) on the grounds that they will be more than offset by a greater child tax credit (described further below), a higher standard deduction amount, and other advantageous tax adjustments.
5. Increased Child Tax Credit
You may be eligible for a $2,000 tax credit if you have a kid under the age of 17, $1,400 of which is refundable (payable even if more than the tax you owe).In 2018, the child tax benefit is twice what it was before. You may claim the credit for each kid who qualifies.
In addition, the income thresholds for qualifying have been significantly raised—$400,000 for joint filers and $200,000 for others. This implies that more people will be able to claim the credit.
In addition, there is a new $500 child tax credit for additional dependents who are not your qualifying kid (e.g., a disabled child of yours who is age 22 and lives with you).This credit is not refundable, but it does reduce your tax liability dollar for dollar.
6. SALT Limitation
If you itemize your deductions, the amount you may deduct for state and local taxes (SALT), including state income or sales tax and local property taxes, is restricted to $10,000 in 2018 ($5,000 for married couples filing separately). There was no limit till today.
If you reside in a high-tax state, you will almost certainly be unable to deduct all of your SALT. Some states have passed or are contemplating passing legislation to allow their people to get a federal tax relief for SALT payments. However, one effort has already been thwarted by the IRS. It remains to be seen if states will go back to the drawing board on this one.
7. Cap on Mortgage Interest
If you secured a mortgage to purchase or construct your primary property (plus one additional home) before December 16, 2017, you’re in the clear and may deduct all of your mortgage interest (referred to as “acquisition indebtedness”) on borrowing up to $1 million ($500,000 if married and file separately). However, if you have a recent mortgage, your interest is restricted to $750,000 (or half that if you’re married and file separately).
Until recently, people used their home equity to pay off credit card debt, take a vacation, or fund their child’s education. However, no deduction for interest on a home equity loan may be made on 2018 returns, regardless of when you received it. However, if you use the funds to build an addition to your house or make other significant renovations, the interest is considered acquisition indebtedness and is deductible up to the aggregate amount mentioned above.
8. Miscellaneous Unreimbursed Deductions
You’re out of luck if you’ve been deducting unreimbursed employee business expenditures like union dues, business driving, and job-searching expenses. Miscellaneous itemized deductions subject to a 2% of adjusted gross income (AGI) threshold are not deductible. One expects that your company has or will implement an accountability plan to compensate you for business costs; this reimbursement will not be taxed.
Similarly, investment expenditures like safe deposit box rents and investment advising fees are no longer tax deductible. They were also various itemized deductions subject to the 2%-of-AGI ceiling. One job-related deduction was preserved: the deduction of up to $250 for teachers who purchase school materials for their classrooms is still in effect.
9. Federally Declared Disaster Losses
The itemized deduction for casualty and theft losses to personal-use property, such as your home, household goods, automobile, and jewelry, may be claimed only if the losses were caused by federally declared disasters. Those who suffered uninsured losses as a result of 2018 catastrophes like as the Mt. Kilauea volcano eruption, Hurricanes Florence or Michael, or California wildfires may be entitled for a write-off. Check with FEMA for disaster declarations for 2018.
10. Higher AMT Exemption
Until recently, around four million people (mainly those with incomes of $200,000 to $500,000) paid the alternative minimum tax (AMT) since it was higher than their usual tax burden. That has now changed.
The AMT exemption limit for 2018 has been raised to $109,400 for joint filers and surviving spouses, $70,300 for individuals and heads of households, and $54,700 for married couples filing separately. Furthermore, the phase-out threshold for these exemption amounts has been raised to $1 million for joint filers and surviving spouses, or $500,000 for other taxpayers.
As a consequence of these larger sums, just roughly 200,000 people are expected to pay this dreaded tax in 2018. In summary, if you were not previously subject to the AMT and your income position has stayed about the same, you have even less cause to be concerned about it in the future.
11. Adjustments to Gross Income
Do you have an individual retirement account (IRA) or a Health Savings Account (HSA)? These and most other deductions are the same whether you itemize or use the standard deduction (though there have been some changes for inflation).
However, the above-the-line moving cost deduction is no longer available unless you are an active-duty military member relocating due to military orders. You cannot deduct the expense of transferring your home if you move for work or business. Furthermore, beginning in 2018, if your company reimburses you for relocation expenses, you will be taxed on this.
12. A 20% Deduction for Business Income
You may be eligible for a qualified business income (QBI) deduction if you are an independent contractor or operate a company (other than a C corporation). To the extent you are qualified, you claim it as a personal deduction on Form 1040, whether you itemize or take the standard deduction.
13. Higher Estate Tax Exemption
Filing yearly income tax returns isn’t the only way the federal government collects money; there are also estate and gift taxes. While the federal inheritance tax remains in effect, a large exemption amount ensures that only the extremely rich need to be worried about tax preparation for their heirs. The exemption for people dying in 2018 is $11.18 million. (You may utilize the same exemption amount to donate property over your lifetime.) In the case of married couples, any unused sum might be allocated to the inheritance of the surviving spouse in the future. However, lesser exemptions that exist in other states should not be overlooked.
The Bottom Line
Will you do better or worse on your 2018 tax return as compared to your 2017 tax bill? Only completing your return will reveal the truth. If you reside in a low-tax state and don’t itemize, you should get a substantial tax savings. On the other hand, if you reside in a high-tax state (and also pay state and local taxes) and have a large mortgage and are used to itemizing, you may face a greater tax burden. This is also true if you are among the unlucky low-six-figure incomes who have jumped from the 28% to the 32% tax rate.
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