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Major tax legislation at the end of 2017 has suspended many prized deductions for 2018 through 2025, while cutting tax rates. Here are the details:
Altered and eliminated tax deductions
- Personal exemptions. You can no longer count on personal exemptions, including dependency exemptions for children and other relatives. They are eliminated.
- State and local tax (SALT). The deduction for state and local tax (SALT) payments is limited to $10,000 annually.
- Mortgage interest. Mortgage interest deductions are modified, including eliminating deductions for home equity loan payments…unless funds from the loan were used to build, buy or substantially improve your home.
- Miscellaneous expenses. The deduction for miscellaneous expenses, including unreimbursed employee expenses, is eliminated.
- Moving expenses. Deductions for moving are eliminated (except for military personnel).
- Casualty and theft loss. Casualty and theft loss deductions are eliminated (except for losses in federally declared disaster areas).
Enhanced tax deductions
- Standard deduction. The standard deduction was nearly doubled to $12,000 for single filers and $24,000 for married filing jointly for 2018.
- 20-percent business deduction. A new up-to-20 percent deduction is allowed for qualified business income (QBI) of pass-through entities, including sole proprietors.
- Child Tax Credit (CTC). The Child Tax Credit (CTC) is doubled to $2,000 (with a maximum refundable amount of $1,400) per qualifying child.
- Medical expenses. The threshold for deducting medical expenses is lowered from 10 percent of adjusted gross income (AGI) to 7.5 percent of AGI for 2018.
- Alternative minimum tax (AMT). Favorable modifications apply to the AMT calculations, meaning far fewer taxpayers will be affected.
REMINDER: Rules have changed for these five tax breaks
New tax legislation provides numerous tax benefits for individuals for 2018 through 2025. But not all the changes are likely to align with your go-to tax strategy from previous years. Here are five big tax breaks that could leave you with a tax surprise come April 2019.
State and local taxes: The new tax law limits the deduction for state and local taxes (SALT) to $10,000 annually. This includes any combination of property taxes AND income or sales taxes.
Entertainment expenses: You can no longer deduct 50 percent of your entertainment expenses. But there’s still some leeway. According to a new IRS ruling, you may deduct 50 percent of food and beverages paid separately from entertainment like a basketball or hockey game. Also, a business can deduct 100 percent of the cost of its holiday party.
Miscellaneous expenses: The new law eliminates deductions for miscellaneous expenses, such as out-of-pocket employee business expenses. If possible, have these expenses reimbursed by your employer’s accountable plan. Generally, the expenses are deductible by the employer and tax-free to employees.
Kiddie tax: The kiddie tax continues to apply to unearned income above $2,100 received by a dependent child under 19 or full-time student under 24. But the new law puts more teeth into this tax. The kiddie tax is now based on the tax rates for estate and trusts. This generally produces a higher tax, so plan intra-family transfers accordingly.
Home equity loans: In the past, a homeowner could deduct mortgage interest paid on the first $100,000 of home equity debt, regardless of use of the proceeds. The new law eliminates this deduction for home equity debt, unless the proceeds from the loan are used to buy, build or substantially improve your home. Fortunately, you may still deduct interest on the first $750,000 of acquisition debt acquired after December 2017.
Tax records needed for 2018 tax returns
- Personal information: You still must provide your Social Security number (SSN), and SSNs for your spouse and dependents. For electronic filing, you will need your CA driver’s license or state issued identification card.
- Employment information: Have all Forms W-2 for you and your spouse. A self-employed person must report income from Forms 1099-MISC and Forms K-1, plus information for calculating the new deduction on qualified business income (QBI).
- Child expenses: Provide information for claiming the increased Child Tax Credit (CTC) and Child and Dependent Care Credit. This may include details for a dependent care provider.
- Investments: Include all information on various Forms 1099 for capital gains and losses (including cost/basis information), dividends and interest. Fortunately, this can often be scanned electronically.
- Retirement plans/IRAs: Report contributions to plans and IRAs, the value of accounts and distributions received on Forms 1099-R.
- Rental properties: This requires records of income received and expenses paid in 2018, including amounts, dates and places.
- State and local taxes (SALT): Recent legislation limits annual SALT deductions to $10,000 for 2018-2025, but itemizers still need relevant records of SALT payments, especially for their California tax return, which does not conform to Federal limitations.
- Charitable donations: If you itemize, you generally need records for both monetary gifts and donations of property, plus appraisals for property valued above $5,000.
- Mortgage interest: Itemizers must have Forms 1098 for mortgage interest on acquisition debts that remain deductible.
- Medical expenses: Collect records and receipts for medical expenses that may push you above the “floor” of 7.5 percent of adjusted gross income (AGI) for 2018.
- Education expenses: Provide information required for claiming higher education credits, including Forms 1098-T.
Under the new legislation, you may not need records this year for miscellaneous expenses, many casualty and theft losses, moving expenses and home equity debts.