Tax Reform Changes

2018 Tax Changes by Topic

The Tax Reform Changes website shows you how the new tax law may change your future tax filings and helps you plan for these changes. Currently the site addresses the most common 2017 IRS Form 1040, US Individual Income Tax Return topics and whether the tax law has changed or not. It provides line by line explanations and scenarios to describe how the new law may affect you. You can also sign up to receive email notifications as the website is updated with new tax law information.

The information on this page is categorized by tax topic in the order of the IRS Form 1040. Simply choose a tax return category such as income or payments and find information including the previous (2017) tax law information and the tax law change, if any, plus scenarios to describe how the new law may affect you.

The 2018 Form 1040, schedules and instructions are now available. Our Tax Reform Changes website shows where the new tax law items can be found on the 2018 form, in addition to the 2017 form.

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Income

Qualified Business Income Deduction

Updated on: Feb 27, 2019

The Internal Revenue Service provided additional guidance through the issuance of final regulations relating to the new rules allowing many owners of sole proprietorships, partnerships, trusts and S corporations to deduct up to 20 percent of their qualified business income (QBI). The new rules also allow eligible taxpayers a deduction of up to 20 percent of their qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.  Wages earned as an employee are not eligible for the deduction. Income earned by a C corporation is also not eligible for the deduction.

 

The new deduction — referred to as the Section 199A deduction or the deduction for qualified business income — was created by the Tax Cuts and Jobs Act. The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on their 2018 federal income tax return. The deduction is available, regardless of whether a taxpayer itemizes their deductions on Schedule A or takes the standard deduction. The Section 199A deduction is set to expire in 2025.

 

The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. For those taxpayers, the deduction is generally equal to the lesser of (1) 20 percent of QBI plus 20 percent of their qualified REIT dividends and qualified PTP income, or (2) 20 percent of taxable income minus net capital gain. QBI includes domestic income from a qualified trade or business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. Amounts received as wages, capital gain, interest, and dividend income are not included.

For certain taxpayers who are engaged in a rental real estate enterprise and are unsure of whether they meet the section 162 trade or business test, see the safe harbor rules and requirements in IRS Notice 2019-07.

The deduction for taxpayers above the $157,500/$315,000 taxable income thresholds is subject to additional limitations. First, QBI from a business is limited to the lesser of (1) 20% of the taxpayer’s QBI from the business or (2) the greater of these two amounts:

 

  • 50 percent of the taxpayer’s share of Form W-2 wages paid by the business; or

  • 25 percent of the taxpayer’s share of Form W-2 wages paid by the business plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the business.

 

In addition, for taxpayers with income above the threshold amounts, a taxpayer’s trade or business income will not be eligible for the deduction if the business is considered a specified service trade or business (SSTB). The W-2 wage, UBIA, and SSTB limitations are phased in for taxpayers with income above the taxable income threshold amounts and do not apply to taxpayers with taxable income below the threshold amounts.  The threshold amounts are adjusted annually for inflation. 

 

The limitations and additional rules are fully described in the final regulations.

Previous (2017)

Not Applicable

Change

The new tax law allows many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income.

How will this affect me?

Scenario 1

Scenario 1 (single filer under the $157,500 threshold with no capital gain)

Sam is a sole proprietor with qualified business income (QBI) of $120,000  for tax year 2018. He has no other source of income or loss outside of his sole proprietorship as a mechanic. After applying the standard deduction but before determining the section 199A deduction, Sam’s taxable income for 2018 is $108,000. Under section 199A, Sam is entitled to a deduction equal to the lesser of (1) 20 percent of his QBI or (2) 20 percent of his taxable income minus net capital gain. 20 percent of Sam’s QBI is $24,000 ($120,000 x 20%). 20 percent of Sam’s taxable income minus net capital gain is $21,600 ($108,000 x 20%). Thus, Sam is entitled to a section 199A deduction of $21,600. This deduction may be taken in addition to the standard deduction, reducing Sam’s taxable income for 2018 to $86,400.

Scenario 2

Scenario 2  (joint filer over the $315,000 threshold, but below the phase-in threshold of $415,000)

 

Henry and Wanda are married and intend to file jointly for tax year 2018. Henry is a partner in a real estate partnership. Henry’s share of the partnership’s QBI is $300,000, and his share of W-2 wages paid by the partnership is $40,000. The partnership holds no qualified property so Henry’s share of UBIA is $0.  Wanda earns wages from an unrelated company. Henry and Wanda’s combined taxable income for 2018 is $375,000 (which is within the phase-in threshold of $415,000). Harry and Wanda have no capital gain or loss for tax year 2018.

 

Because Henry’s and Wanda’s taxable income is above the threshold amount, their section 199A deduction is subject to additional limitations but, because they are within the phase-in range, the limitations will be phasedin. Because the partnership holds no qualified property, only the W-2 wage limitation applies. In order to apply the W-2 wage limitation, Henry and Wanda must first determine 20 percent of Henry’s share of the partnership’s QBI. 20 percent of Henry’s share of the partnership’s QBI is $60,000 ($300,000 x 20%). Next, Henry and Wanda must determine 50 percent of Henry’s share of the partnership’s W-2 wages. 50 percent of Henry’s share of the partnership’s W-2 wages is $20,000 ($40,000 x 50%). Because 50 percent of Henry’s share of the partnership’s W-2 wages is less than 20 percent of Henry’s share of the partnership’s QBI, Henry and Wanda must determine the QBI component of their section 199A deduction by reducing 20 percent of Henry’s share of the partnership’s QBI by the reduction amount.

 

Henry and Wanda are 60 percent through the phase-in range (that is, their taxable income exceeds the threshold amount by $60,000, and their phase-in range is $100,000). The excess amount is $40,000 (20 percent of Henry’s share of the partnership’s QBI, or $60,000, less 50 percent of Henry’s share of the partnership’s W-2 wages, or $20,000). The reduction amount is equal to 60 percent of the excess amount, or $24,000. Thus, the QBI component of Henry’s and Wanda’s section 199A deduction is equal to $36,000, 20% of B’s $300,000 share of the partnership’s QBI (that is, $60,000), reduced by $24,000. Henry’s and Wanda’s section 199A deduction is equal to the lesser of 20% of the QBI from the business as limited ($36,000) or (ii) 20% of Henry and Wanda’s taxable income ($375,000 x 20% = $75,000). Therefore, their section 199A deduction is $36,000 ($60,000 reduced by $24,000) for 2018.

Scenario 3

Scenario 3 (joint filer over the $315,000 threshold, but below the phase-in threshold of $415,000 and with income from a specified service trade or business)

 

Assume the same facts as in Scenario 2, except that the partnership is engaged the practice of law, which is considered a specified service trade or business (SSTB). Because Henry and Wanda’s income is within the phase-in range, we must reduce the QBI and W-2 wages allocable to Henry from the SSTB to the applicable percentage. Their applicable percentage is 40 percent (100 percent reduced by the ratio that their taxable income for the taxable year ($375,000) exceeds their threshold amount ($315,000), or $60,000, bears to $100,000). The applicable percentage of Henry’s QBI is $120,000 ($300,000 x 40%) and the applicable percentage of Henry’ share of W-2 wages is $16,000 ($40,000 x 40%). These reduced numbers must then be used to determine how Henry’s section 199A deduction is limited.

 

The W-2 wage limitation is twenty percent of Henry’s share of the partnership’s QBI of $120,000, or $24,000. Fifty percent of Henry’s share of the partnership’s W-2 wages of $16,000 is $8,000. Because 50 percent of Henry’s share of the partnership’s W-2 wages ($8,000) is less than 20 percent of Henry’s share of the partnership’s QBI ($24,000), Henry and Wanda must determine the QBI component of their section 199A deduction by reducing 20 percent of Henry’s share of the partnership’s QBI by the reduction amount.

 

Henry and Wanda are 60 percent through the phase-in range, as previously calculated in Scenario 2. They must determine the excess amount, which is the excess of 20 percent of Henry’s share of the partnership’s adjusted QBI, or $24,000, over 50 percent of Henry’s share of the partnership’s adjusted W-2 wages, or $8,000. Thus, the excess amount is $16,000. The reduction amount is equal to 60 percent of the excess amount, or $9,600. Thus, the QBI component of Henry and Wanda’s section 199A deduction is equal to $14,400 – 20 percent of Henry’s share the partnership’s QBI of $24,000, reduced by the excess amount of $9,600. Henry and Wanda’s section 199A deduction is equal to the lesser of 20 percent of the QBI from the business as limited ($14,400) or 20 percent of their taxable income ($375,000 x 20% = $75,000). Therefore, Henry and Wanda’ section 199A deduction is $14,400 for 2018.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 12
2018 Form 1040, line 9

Other Income

Updated on: Dec 6, 2018

The new tax law made minor changes to the types of income reported on line 21.

Previous (2017)

Line 21 is used to report taxable income that you didn’t report elsewhere on your return or other schedules. Examples of Other Income include:

 

  • Most prizes and awards;
  • Gambling winnings, including lotteries and raffles;
  • Jury duty pay;
  • Hobby income;
  • Cancelled debts;
  • Taxable distributions from a Coverdell education savings account or a qualified tuition program;
  • Health Savings Account (HSA) distributions not used to pay or reimburse you for qualified medical expenses;
  • Reimbursements for items erroneously deducted in an earlier year (such as medical expenses and real estate taxes);
  • Alaska Permanent Fund dividends;
  • Net operating loss (NOL) deduction carried over from a previous year; and
  • Taxable portions of disaster relief payments.

 

You shouldn’t report the following as Other Income:

 

  • Self-employment income; or
  • Non-taxable income (child support, life insurance proceeds, gifts).
Change

The new tax law generally didn’t change the types of taxable income reported in Line 21, Other Income. However, it did make the following miscellaneous changes:

 

  • Discharge of Student Debt Due to Death or Disability: For tax years beginning after December 31, 2017, a discharge of student debt due to death or total and permanent disability (TPD) is no longer included in income.
  •  
  • NOL Carrybacks: For noncorporate taxpayers, any net operating loss (NOL) arising in a taxable year ending after December 31, 2017, the new tax law generally disallows the carryback of net operating losses (NOLs) but allows for the indefinite carryforward of NOLs.

How will this affect me?

Scenario 1

In 2018, Dylan builds model airplanes as a hobby and sometimes sells the completed models on Craigslist. During the year, Dylan also received compensation for serving on a jury. Dylan reports income from these activities as Other Income on Form 1040, line 21.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 21
2018 Schedule 1, line 21

Pensions and Annuities

Updated on: Nov 29, 2018

The new tax law generally didn’t change the taxation of pension and annuities, but added a new disaster tax relief provision.

Previous (2017)

Pension and annuity payments include amounts received from 401(k), 403(b), and governmental 457(b) plans.

 

If you have a pension or annuity, then you are fully taxed on the amounts received which exceed your cost in the pension or annuity. Your cost is your net investment in the plan as of the annuity starting date (or the date of the distribution, if earlier).

 

If you haven’t recovered your cost, then depending on your circumstance, you’ll be partially taxed or not taxed at all on the amounts received. For full rules, see IRS Publication 575: Pension and Annuity Income; 1040 Instructions: Line 16.

 

Certain types of pensions and annuities aren’t subject to taxation upon distribution. For instance, qualified distributions received under a Roth 401(k) plan aren’t taxable.

 

If you received a payment from a pension or annuity, then you should’ve received an IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., with Box 1 indicating the total amount of your pension/annuity payments before income tax or other deductions were withheld.

Change

The new tax law generally didn’t change the taxation of pension and annuities.

 

However, it did provide tax relief to taxpayers affected by federally declared disasters that occurred in 2016. Eligible taxpayers are exempt from the 10 percent additional tax imposed on early withdrawals from an eligible retirement plan if the withdrawal qualifies as a disaster distribution, and can include disaster distributions in gross income over three years.

How will this affect me?

Scenario 1

Bedford purchases a 10-year annuity in 2016 for $12,000. The annuity plan pays $120 a month (or $1,200 a year). Bedford excludes a portion of the $120 every month. His annuity payments become fully taxable when he has recovered the cost of his investment, that is, $12,000. Bedford reports on lines 16a and 16b the total amount of the annuity payment as well as the taxable amount shown on IRS Form 1099-R,
Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc..

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 16a and 16b
2018 Form 1040, line 4a and 4b

Other gains or (losses)

Updated on: Aug 15, 2018

A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. An exchange is a transfer of property for other property or services.

 

You usually realize gain or loss when property is sold or exchanged. A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. A loss occurs when the adjusted basis of the property is more than the amount you realize on the sale or exchange.

 

The new tax law didn’t make any changes to the types of income reported on IRS Form 1040, Line 14, Other gains or losses.

 

Note: The new law created new deduction limits and expensing rules under Internal Revenue Code (IRC) § 179.

 

 

Previous (2017)

Line 14 on the IRS Form 1040 tax return is used to report gains or losses from the sale of property used in a trade or business that you didn’t report elsewhere on your return or other schedules.

 

Examples of other gains or losses include:

 

  • Gain or loss resulting from the sale or exchange of property used in the trade or business;
  • Certain involuntary conversions of property used in the trade or business;
  • Certain disposition of noncapital assets;
  • Disposition of capital assets not reported on IRS Form Schedule D, Capital Gains and Losses;
  • Dispositions of certain depreciable business property (IRC § 167 or § 179 property);
  • Certain computation of recapture amounts (under IRC §§ 179 and 280F(b)(2)); and
  • The gain or loss from deemed sales of securities or commodities with a mark-to-market election.

 

If you have a net gain or loss from these types of sales, report them on IRS Form 4797, Sales of Business Property, and report the ordinary gain or loss from these types of sales on IRS Form 1040, Line 14.

Change

The new tax law didn’t generally change the types of taxable income reported on Line 14, Other gains or losses, and Form 4797.

 

Note: The new law created new deduction limits and expensing rules under Internal Revenue Code (IRC) § 179 and expanded the definition of § 179 property.

How will this affect me?

Scenario 1

Dean purchased business property, which is section 1245 property, for $50,000. He made no permanent improvements to the property and claimed depreciation totaling $10,000. His adjusted basis in the property is $40,000 ($50,000 – $10,000 depreciation).

 

Scenario 2

He sold the business property on the market for $60,000. Dean reports a gain on the sale of $20,000 ($60,000-$40,000) on IRS Form 4797, Sales of Business Property, as $10,000 ordinary gain and $10,000 long-term capital gain. The ordinary gain of $10,000 is reported on IRS Form 1040, Line 14, and the long-term capital gain of $10,000 is reported on IRS Form 1040, Line 13. 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 14; Form 4797
2018 Schedule 1, line 14

Interest Income (Taxable & Tax-Exempt Interest)

Updated on: Aug 8, 2018

Most interest that you receive or that’s credited to an account that you can withdraw without penalty is taxable income in the year it becomes available to you.

 

The new tax law didn’t change the treatment of taxable or tax-exempt interest income.

Previous (2017)

Most interest received by you or credited to your account that you can withdraw without penalty is income.

 

Taxable interest includes: interest on bank accounts, money market accounts, certificates of deposit, corporate bonds, and deposited insurance dividends. Taxable interest also includes interest income from Treasury bills, notes, and bonds.

 

Some interest received by you isn’t counted as income for tax purposes. Tax-exempt interest is commonly earned from qualifying municipal and state bonds, which are issued to finance public improvements.

 

Other less common sources of tax-exempt interest income include interest on insurance dividends left on deposit with the U.S. Department of Veteran Affairs, and interest redeemed from Series EE and Series I bonds issued after 1989 when used to pay for qualified higher educational expenses during the year. See IRS Publication 970 – Educational Savings Bond Program.

 

Each payor of interest should’ve sent you an IRS Form 1099-INT, Interest Income or IRS Form 1099-OID, Original Issue Discount, which will indicate your total taxable interest income.

 

If you earn more than $1,500 in interest income, you must fill in and attach an IRS Form Schedule B, Interest and Ordinary Dividends.

Change

For other than very large taxpayers, the new tax law didn’t change the treatment of taxable or tax-exempt interest income.

How will this affect me?

Scenario 1

Shirley opens a savings account with Money Bank and deposits $10,000. Money Bank provides its customers with an annual percentage yield (APY) of 1.5 percent.

 

At the end of the year, Shirley receives a check for $150 from Money Bank. The $150 is taxable interest income to Shirley and should be reported on line 8a of Shirley’s Form 1040 tax return.

Scenario 2

The city of Birmingham issues qualifying tax-exempt bonds to generate revenue to pay for new roads. Shirley, a resident of Birmingham, purchases five bonds for $50,000. The bonds have a coupon rate of 4.8 percent and mature in three years.

 

At the end of the first year, Shirley is paid $2,400 of tax-exempt interest, and it is reported in Box 8 on Form 1099-INT, Interest Income. Shirley must declare this as tax-exempt interest on Line 8b of her Form 1040 tax return, but she won’t be taxed on this income.

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 8a and 8b
2018 Form 1040, line 2a and 2b

Capital Gain or (Loss)

Updated on: Aug 8, 2018

Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you dispose of a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss.

 

The new tax law didn’t make any changes to the tax treatment of capital gain or loss. Note: The new tax law provided inflation adjustments for the income brackets used to determine the long-term net capital gain rate.

Previous (2017)

You have a capital gain, if the amount received from the sale or exchange of a capital asset exceeds (is more than) your adjusted basis in the capital asset.

 

You have a capital loss, if the amount received from the sale or exchange of a capital asset is less than your adjusted basis in the capital asset.

 

Capital assets include almost everything owned by you for either personal or investment purposes. Examples include your home, personal-use items like household furnishings, and stocks and bonds held as investments. Your adjusted basis is generally the total cost you paid for the asset plus any improvement costs and minus any depreciation deductions taken.

 

Gains from the sale or exchange of capital assets are taxed at different rates depending on the length of time you had the assets Generally:

 

  • Gains from the sale or exchange of capital assets held for more than one year are taxed at favorable capital gains rates.
  • Gains from the sale or exchange of capital assets held for not more than one year are taxed at ordinary income rates.

 

To calculate short-term and long-term capital gain or loss, refer to IRS Form 8949, Sales and other Dispositions of Capital Assets and IRS Schedule D, Capital Gains and Losses.

 

Note: The law places a limit on the deduction for capital loss and allows you to carry the unused loss forward to later years. For more details, see capital gains and losses instructions.

Change

The new tax law didn’t change the tax treatment of capital gain or loss.

 

Note: The new tax law provided inflation adjustments for the income brackets used to determine the long-term net capital gain rate.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 13
2018 Schedule 1, line 13

Taxable Refunds, Credits, or Offsets of State and Local Income Taxes

Updated on: Aug 8, 2018

If you received a refund, credit, or offset of state or local income taxes in 2017, you may be required to report this amount as income on your tax return.

 

The new tax law didn’t change the treatment of taxable refunds, credits, or offsets of state and local income taxes.

Previous (2017)

If you received a refund, credit, or offset from either state or local income taxes, you must include that amount as income if you deducted the tax in an earlier year.

 

Exception: You won’t be taxed on the refund, credit, or offset if you didn’t itemize deductions or elected to deduct state and local general sales taxes instead of state and local income taxes. For more information, see IRS Publication 525 or IRS Form 1040 Instructions – Line 10.

 

The government agency which provided you with the benefit should have provided you with an IRS Form 1099-G, Certain Government Payments, with Box 2 listing the amount of the benefit.

Change

The new tax law didn’t change the treatment of taxable refunds, credits, or offsets of state and local income taxes.

How will this affect me?

Scenario 1

In 2017, Yang overpaid his state income taxes. Yang receives a refund check from the state of Maryland in 2018. Yang itemized deductions and didn’t elect to deduct state and local general sales taxes instead of state and local income taxes. Yang will be taxed on the amount refunded in the 2018 tax year.

 

Scenario 2

In 2017, Yang overpaid his state income taxes. Yang chose to apply the overpaid amount of his 2017 taxes to his 2018 state income tax liability. Yang itemized deductions and didn’t elect to deduct state and local general sales taxes instead of state and local income taxes. Yang will be taxed on the amount credited in the 2018 tax year.

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 10
2018 Schedule 1, line 10

Dividend Income (Ordinary dividends & qualified dividends)

Updated on: Aug 6, 2018

Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation.

 

Most distributions are made in cash (check). However, distributions can consist of more stock, stock rights, other property, or services. Note that distributions of a company’s own stock or rights to this stock may not qualify as dividends.

 

The new tax law didn’t change the treatment of dividend income.

Previous (2017)

Dividends are a form of investment income a corporation may pay you if you own stock in that corporation. Dividends may additionally be received from ownership interest in a trust/estate, a partnership, or an S-corporation.

 

Dividends are usually paid in cash.

 

Dividends are taxed at either ordinary income rates or at lower long-term capital gains rate. Dividends taxed at ordinary income rates are called ordinary dividends. Dividends taxed at the lower long-term capital gains rate are called qualified dividends.

 

Qualified dividends are paid from stock held for more than a statutorily-mandated period. For more information, see Publication 550, Investment Income and Expenses.

 

If you own stock in a corporation which pays dividends over $10 annually, the corporation will send you an IRS Form 1099-DIV, Dividends and Distributions. This form should indicate whether the dividends are ordinary or qualified. See IRS Form1040 Instructions.

 

If you earn more than $1,500 in dividend income, you must fill in and attach an IRS Form Schedule B, Interest and Ordinary Dividends. Not all distributions are taxable. Some distributions are a return of your cost or basis. You won’t be taxed on those distributions until you recover your cost. For more information, see IRS Publication 550, Investment Income and Expenses.

Change

The new tax law didn’t change the treatment of dividend income.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 9a and 9b
2018 Form 1040, line 3a and 3b

Wages, Salaries, Tips, etc.

Updated on: Aug 6, 2018

You must include all wages, salaries and tips you receive as an employee of an employer as income on your tax return.

 

The new tax law didn’t change the treatment of wages, salaries, or tips.

Previous (2017)

Line 7 of the IRS Form 1040, U.S. Individual Income Tax Return, generally must include:

 

  • all wages you receive;
  • all tips that you did not report to your employer;
  • dependent care benefits you received;
  • employer-provided adoption benefits you received;
  • excess elective deferrals;
  • disability pensions you received before the minimum retirement age set by your employer;
  • and certain scholarship and fellowship income you received.

 

There are exceptions to the above examples. For full rules, see IRS Publication 17.

 

If you’re an employee, your employer should have sent you a IRS Form W-2, Wage and Tax Statement.

 

You can find your total wages in box one (1) of your IRS Form W-2, Wage and Tax Statement.  You must separately add and report tip income you didn’t report to your employer.

 

For procedural information on reporting other forms of income under Line 7 of the IRS Form 1040, see IRS Form 1040 Instructions – [Line 7].

 

Change

The new tax law didn’t change the treatment of wages, salaries, or tips.

How will this affect me?

Scenario 1

Scott is a salaried accountant who makes $75,000 a year. On weekend nights, Scott performs as a country singer at a local restaurant.  Scott isn’t officially employed by the local restaurant, but is occasionally given tips by its patrons.  This year, Scott received $1,500 in tips.  Scott has $76,500 income to report on Line 7 of his IRS Form 1040.

Scenario 2

Scott paid $10,000 in qualified adoption expenses for an eligible child. His employer reimburses him for $4,000 of those expenses pursuant to the employer’s adoption assistance program.  The $4,000 is reported in Box 12 (Code T) of Scott’s IRS Form W-2.  After reviewing the instructions for IRS Form 8839, Qualified Adoption Expenses, Scott determines he can exclude all the adoption benefits from income. He doesn’t include the $4,000 on Line 7 of his IRS Form 1040.

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 7
2018 Form 1040, line 1

Social Security Benefits

Updated on: Aug 6, 2018

If you receive social security benefits, you may have to pay taxes on part of those benefits.

 

The new tax law didn’t make any changes to how your social security benefits are taxed.

Previous (2017)

If you receive social security benefits, you may have to pay taxes on part of those benefits. Social security benefits include monthly retirement, survivor and disability benefits. They don’t include Supplemental Security Income (SSI) payments, which are not taxable.

 

The net amount of social security benefits that you received during the year is reported in Box 5 of IRS Form SSA-1099, Social Security Benefit Statement. You report that amount on your IRS Form 1040, line 20a. The taxable portion of those benefits, if any, is reported on line 20b.

 

To determine whether you must pay taxes on your benefits, compare the following amounts:

 

  1. 50 percent of your social security benefits, plus modified gross adjusted income (including tax-exempt income), against

 

 2. The “base amount” associated with your filing status:

  • $25,000 for single, head of household, qualifying widow(er), and married filing separately and lived apart from your spouse for all the tax year; or
  • $32,000 for married filing jointly; or
  • $0 for married filing separately and lived with your spouse at any time during the tax year.
  • If the base amount equals or is greater than the amount in (1), then you don’t have to pay taxes on any of the benefits. But if the base amount is less than the amount in (1), then generally up to 50 percent (or up to 85 percent under certain situations) of your benefits are taxable.

 

Use this interactive online test or Worksheet 1 on Publication 915, Social Security and Equivalent Railroad Retirement Benefits to find out what portion of your benefits are taxable.

Change

The new tax law didn’t change how your social security benefits are taxed.

How will this affect me?

Scenario 1

Bob received $5,800 in social security benefits during 2018. Social security was the only source of Bob’s income this year. Bob is single, so his base amount is $25,000. His social security benefits aren’t taxable because one-half of his benefits is less than his base amount of $25,000.

 

Scenario 2

Bob and Ivy filed a joint return in 2018. Bob is retired and received $6,000 in social security benefits and a fully taxable pension of $16,000. Ivy received $3,000 in social security benefits and $25,000 in wages.

 

One-half of Bob and Ivy’s benefits plus their other income equals $45,500 (one-half of $9,000 plus $41,000 other income), which is more than the base amount of $32,000. Bob and Ivy must therefore pay taxes on some of their social security benefits.

 

Using the IRS interactive online test, they determined that $5,775 or approximately 64.17 percent of their $9,000 social security benefits should be reported as taxable income.

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 20a and 20b
2018 Form 1040, line 5a and 5b

Unemployment Compensation

Updated on: Aug 1, 2018

Unemployment compensation you receive during the year is income.

The new tax law didn’t make any changes to unemployment compensation.

Previous (2017)

Unemployment compensation or insurance benefits that you receive from the United States or a state government is income in the year you receive it.

Change

The new tax didn’t make any changes to unemployment compensation.

How will this affect me?

Scenario 1

In 2018, Wendell received $10,480 in unemployment compensation from the State of Texas. He reports the full amount as income on his tax return.

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 19
2018 Schedule 1, line 19

IRA Distributions

Updated on: Jul 18, 2018

If you receive Individual Retirement Account (IRA) distributions, you may have fully or partially taxable income depending on the type of IRA and whether your contributions to the IRA were in before-tax or after-tax dollars.

 

The new tax law generally didn’t change the taxability of IRA distributions, but added a new disaster tax relief provision. See Notes below.

Previous (2017)

If you receive IRA distributions, you may have fully or partially taxable income depending on the type of IRA and whether your contributions to the IRA were in before-tax or after-tax dollars. IRA distributions include distributions from traditional IRAs, Roth IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs and Simplified Employee Pension (SEP) IRAs.

 

There are two basic types of IRAs:

 

  • Traditional IRA; and
  • Roth IRA.

 

The taxation differs for these two types of IRAs.

 

  • Traditional IRA contributions may be tax-deductible for the year you make the contribution; withdrawals in retirement of before-tax contributions and earnings are taxed at ordinary income tax rates.
  • Roth IRA contributions are made with after-tax dollars; withdrawals in retirement of contributions and earnings are generally tax-free. However, contributions are subject to income limitations.

 

For more information, see IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Change

The new tax law generally didn’t change the taxability of IRA contributions and distributions.

 

Note: The new tax law gave tax relief to taxpayers affected by federally declared disasters that occurred in 2016. Eligible taxpayers are exempt from the 10 percent additional tax imposed for early IRA withdrawals and can include disaster distributions in gross income over three years. See IRS Publication 976, Disaster Relief.

 

Note: The new tax law eliminated the rule permitting recharacterization of conversion contributions from traditional IRAs to Roth IRAs and of rollovers from other types of plans to Roth IRAs. Other recharacterizations are still permitted.

How will this affect me?

Scenario 1

Before he retired, Austin made only before-tax contributions to his traditional IRA. After he retired at age 65, Austin received a $10,000 IRA distribution during the year. Austin should include the entire amount of his IRA distribution as taxable income on his tax return.

Scenario 2

Before he retired, Austin made after-tax contributions to his Roth IRA for more than five years. After he retired at age 65, Austin received a $10,000 Roth IRA distribution during the year. The Roth IRA distribution isn’t taxable to Austin.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 15a and 15b
2018 Form 1040, line 4a and 4b

Business Income: Home Office Deduction

Updated on: Jun 26, 2018

If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters, and applies to all types of homes.

 

The new tax law didn’t change the rules for the home office deduction for IRS Form 1040, Schedule C (self-employed) taxpayers. The simplified method to determine the deduction is also the same.

Previous (2017)

If you use part of your home exclusively and regularly for conducting business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area. You need to figure out the part of your home, utilities, repairs, and depreciation that you use only for your business activities. There are two methods to help you determine the part of your home used only for your business activities.

 

Regular Method: You compute the business use of home deduction by dividing expenses of operating the home between personal and business use. You may deduct direct business expenses in full, and may allocate the indirect total expenses of the home to the percentage of the home floor space used for business.

 

A qualified daycare provider who doesn’t use his or her home exclusively for business purposes, however, must figure the percentage based on the amount of time the applicable portion of the home is used for business. Self-employed taxpayers filing IRS Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship), first compute this deduction on IRS Form 8829, Expenses for Business Use of Your Home.

 

Simplified Option: You may find the simplified option less burdensome than the regular method. If you meet the requirements, you can use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to compute the business use of home deduction. Under this safe harbor method, depreciation is treated as zero and you claim the deduction directly on IRS Form 1040, Schedule C. Instead of using IRS Form 8829, you indicate your election to use the safe harbor option by making two entries directly on the IRS Form 1040, Schedule C for the square footage of the home and the square footage of the office.

 

This simplified option doesn’t change the criteria for who may claim a home office deduction. It simply makes the calculation and recordkeeping requirements of the allowable deduction easier.

Change

The new tax law didn’t change the rules for the home office deduction for IRS Schedule C (self-employed) taxpayers.

 

The simplified method to determine the deduction is also the same.

How will this affect me?

Scenario 1

Jackson is self-employed and sells woodwork on an online craft platform. He conducts his woodworking, including the packaging, shipping, and related books and records in his basement. The section of his basement used for his business is separate from the section used for personal use.

Scenario 2

Jackson’s home office meets the exclusive use requirement and he must figure out the percentage of his home used for the business to allocate expenses. For his 2018 tax return, he can choose to calculate the home office deduction by using the regular method or the simplified option based on square footage. He chooses the simplified option because his home office deduction calculation and recordkeeping requirements are easier. Because the area Jackson uses for business is 150 square feet, he can deduct $750 ($5 times 150 square feet) for the deduction on Schedule C.

Scenario 3

The same as above, except that the basement area Jackson uses to woodwork is also shared with his wife’s personal craft area. He can’t claim the home office deduction at all, because the home office area is not exclusively (only) used for his business.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 12; 2017 Schedule C, line 30
2018 Schedule 1, line 12

Alimony Received

Updated on: Jun 25, 2018

Currently, amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony for federal tax purposes. Alimony is income to the receiving spouse.

 

There is no change in tax treatment for divorces signed through December 31, 2018. However, in general, for divorces signed after December 31, 2018, the spouse or former spouse receiving alimony will no longer include the alimony in income.

Previous (2017)

The spouse receiving the alimony must include the amount received in income.

 

Note: To qualify as alimony, payments must meet certain requirements.

Change
Alimony and separate maintenance payments aren’t included in income of the receiving spouse.
 

The repeal of including alimony and separate maintenance payments into income applies to any divorce or separation instrument signed after December 31, 2018, or for any divorce or separation instrument signed on or before December 31, 2018, and changed after that date, if the change clearly includes the new tax rule.

 

How will this affect me?

Scenario 1

Emma pays Noah $1,500 of alimony per month based on their divorce decree signed in 2016. Noah will continue to include $18,000 in income and in future tax years.

Scenario 2

Noah and Emma signed their divorce decree in 2018 and Noah was awarded alimony. Since they signed the divorce decree in 2018, the alimony that Emma pays Noah will be included in Noah’s 2018 income.

 

Note: If Noah and Emma had divorced after 2018, Noah wouldn’t include any alimony received in income.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 11
2018 Schedule 1, line 11
 

Adjusted Gross Income (AGI)

Student Loan Interest Deduction

Updated on: Jun 26, 2018

Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntarily pre-paid interest payments. You can claim a deduction for the interest you paid if you meet certain conditions.

 

The new tax law didn’t change the student loan interest deduction. You may still take a deduction for interest you paid on a student loan up to $2,500. Note: The income limitations are adjusted annually for inflation.

 

Note: The new tax law did change the income exclusion for the discharge of student loan debt to include within the exclusion certain discharges because of death or disability.

Previous (2017)

If your modified adjusted gross income (MAGI) is less than $80,000 ($165,000 if filing a joint tax return), you can take a deduction for interest you paid during the year on a qualified student loan (also known as an education loan).

 

The loan proceeds must be used to pay for qualified education expenses for yourself, spouse, or dependent at an eligible education institution. The deduction is limited to $2,500 and will be phased out once your MAGI exceeds $65,000 (or $135,000 if filing a joint tax return).

 

For a more detailed explanation of the requirements to take this deduction, see IRS Publication 970, Tax Benefits for Education.

Change

The new tax law didn’t change the student loan interest deduction. You may still take a deduction for interest you paid on a student loan up to $2,500. Note: The income limitations are adjusted annually for inflation.

How will this affect me?

Scenario 1

In 2018, Isabella paid $3,000 in student loan interest. Isabella is legally obligated to make the student loan payments. She used the loan to pay for tuition, room and board, and supplies to attend college full time between the years 2013 and 2017. She graduated with a bachelor’s degree in economics in 2017. Isabella is married and files a joint tax return with her spouse. Their joint MAGI for 2018 is $130,000. Isabella can deduct $2,500 for student loan interest on her 2018 joint tax return.

 

For examples of phasing out the deduction based on MAGI, see IRS Publication 970, Tax Benefits for Education.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 33
2018 Schedule 1, line 33

Tuition and Fees Deduction

Updated on: Jun 26, 2018

The tuition and fees deduction reduced the amount of a taxpayer’s income subject to tax by up to $4,000.

 

The deduction temporarily expired after tax year 2016, but was later extended to tax year 2017. This deduction is currently not available for tax year 2018.

Previous (2017)

For tax year 2017, you could deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. Qualified education expenses were amounts paid for tuition and fees required for the student’s enrollment or attendance at an eligible educational institution. Required fees included amounts for books, supplies, and equipment used in a course of study.

 

Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance.

 

The deduction wasn’t available if your filing status was married filing separately or if another person could claim an exemption for you as a dependent on his or her tax return. The qualified expenses must have been paid for higher education and the deduction was limited to $4,000.

Change
This deduction is currently not available for tax year 2018 returns.

 

How will this affect me?

Scenario 1

Ava claimed a $4,000 deduction for the college tuition she paid during the year on her tax year 2017 tax return. Unless Congress extends the provision to tax year 2018, she won’t be allowed to take this deduction on her tax year 2018 tax return.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 34; Form 8917

Individual Retirement Arrangement (IRA) Deduction

Updated on: Jun 25, 2018

You may be able to deduct your contributions to a traditional IRA depending on your income, filing status, whether you are covered by a retirement plan at work, and whether you receive social security benefits.

 

A traditional IRA is any IRA that isn’t a Roth IRA or a SIMPLE IRA. You can never deduct contributions to a Roth IRA.

 

The new tax law didn’t change the treatment of deductions for contributions made to an IRA. However, the contribution (deduction) and modified adjusted gross income limitations are adjusted annually for inflation. 

Previous (2017)

For 2017, you can contribute to a traditional IRA up to:

 

  • $5,500, or
  • $6,500 if you were age 50 or older by the end of 2017.

 

However, you may not be able to deduct all your contributions depending on your modified adjusted gross income and whether you or your spouse were covered by an employer retirement plan.

 

For a more detailed description of the requirements to deduct IRA contributions, see IRS Publication 590-A, Contributions to Individual Retirement Arrangements.

Change

The new tax law didn’t change the treatment of deductions for contributions made to an IRA. However, the contribution (deduction) and modified adjusted gross income limitations are adjusted annually for inflation. 

How will this affect me?

Scenario 1

For examples see IRS Publication 590-A, Contributions to Individual Retirement Arrangements for examples on calculating the IRA deduction.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 32
2018 Schedule 1, line 32

Moving Expenses

Updated on: Jun 25, 2018

The new tax law eliminated the moving expense deduction for tax years 2018 through 2025. However, during that period, it retains the deduction for members of the Armed Forces (or their spouse or dependents) on active duty that move because of a military order and incident to a permanent change of station.

Previous (2017)

For tax years beginning before 2018, if you moved due to a change in your job or business location, or because you started a new job or business, you could deduct your reasonable unreimbursed moving expenses but not any expenses for meals. You could deduct your moving expenses, if you met all three of the following requirements:

 

  • Your move closely relates to the start of work;
  • You meet the distance test; and
  • You meet the time test.

 

If you’re a member of the Armed Forces who is on active duty and moved because of a military order, and incident to a permanent change of station, you didn’t need to satisfy the distance and time tests.

 

If you were working abroad or are a survivor of a decedent who was working abroad and, upon permanent retirement (or in the case of a survivor, death of the taxpayer working abroad), you move to the United States or one of its possessions, you don’t have to meet the time test.

 

For a detailed description of each of these requirements, see IRS Publication 521, Moving Expenses.

Change
For tax years beginning after December 31, 2017, you can’t deduct any moving expenses incurred in a work-related move.

 

However, the law doesn’t change for members of the Armed Forces (including their spouse or dependents) on active duty that move because of a military order and incident to a permanent change of station.

How will this affect me?

Scenario 1

Mason and Olivia moved in 2018 because Olivia started a new job in a location 100 miles farther away from home than her former job location. They incurred $5,000 in reasonable moving expenses, excluding meals, in 2018. Neither Mason nor Olivia are active members of the military. They can’t deduct their moving expenses on their 2018 tax return.

Scenario 2

Same as above, except Olivia is on active duty in the Navy and moved pursuant an order that requires her to permanently change her station to a location 40 miles farther away from home than her former station. They are permitted to deduct their reasonable moving expenses, $5,000, on their 2018 tax return.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 26; Form 3903
2018 Schedule 1, line 26

Educator Expenses

Updated on: Jun 23, 2018

An eligible educator can deduct up to $250 of any unreimbursed business expenses for certain classroom materials, computers including related software and services or other equipment used in the classroom. Supplies for courses on health and physical education qualify only if they are related to athletics.

 

The new tax law didn’t change how you can deduct educator expenses. However, the amount of the deduction is annually adjusted for inflation.

Previous (2017)

If you’re an eligible educator, you can deduct up to $250 ($500 if you’re filing a married filing joint tax return and both you and your spouse are eligible educators, but not more than $250 each) of unreimbursed trade or business expenses.

 

Qualified expenses are amounts you paid or incurred for participation in professional development courses, books, supplies, computer equipment (including related software and services), other equipment, and supplementary materials that you use in the classroom. For courses in health or physical education, the expenses for supplies must be for athletic supplies.

 

You’re an eligible educator, if you’re a kindergarten through grade 12 teacher, instructor, counselor, principal or aide for at least 900 hours during a school year in a school that provides elementary or secondary education as determined under state law.

Change

The new tax law didn’t change how you can deduct educator expenses. However, the amount of the deduction is annually adjusted for inflation. 

How will this affect me?

Scenario 1

Jacob is a full-time 6th grade homeroom and math teacher. In 2018, Jacob spent $300 on books and supplies used in the 6th grade classroom. Jacob didn’t receive reimbursement for his expenses. Jacob is married to Sophia, who is an attorney. Jacob and Sophia can only deduct $250 of educator expenses on their joint tax return.

Scenario 2

Same as above, but Sophia is a full-time middle school physical education teacher. In addition to Jacob’s educator expenses, Sophia spent $200, of which only $150 was for athletic supplies. Jacob and Sophia will be able to deduct educator expenses in the amount of $400 ($250 for Jacob and $150 for Sophia) on their joint tax return.

 

Note: Sophia can’t take a deduction for the $50 she spent on supplies not related to her athletics class.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 23
2018 Schedule 1, line 23

Health Savings Account (HSA) Deduction

Updated on: Jun 23, 2018

You may qualify to claim a tax deduction for contributions you, or someone other than your employer, make to your HSA.

 

The new tax law didn’t change the treatment of the HSA deduction. Note: There are annual inflationary adjustments to the deductibility limitations. 

Previous (2017)

An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual.

 

Contributions, other than employer contributions, are deductible on your return whether or not you itemize deductions. Employer contributions aren’t included in income. Distributions from an HSA that are used to pay qualified medical expenses aren’t taxed.

 

The amount you or any other person can contribute to your HSA depends on the type of high deductible health plan (HDHP) coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual.

 

For 2017, if you have self-only HDHP coverage, you can contribute up to $3,400. If you have family HDHP coverage, you can contribute up to $6,750.

 

For 2018, if you have self-only HDHP coverage, you can contribute up to $3,450. If you have family HDHP coverage, you can contribute up to $6,900.

Change

The new tax law didn’t change the treatment of the HSA deduction. 

 

Note: There are annual inflationary adjustments to the deductibility limitations. 

How will this affect me?

Scenario 1

For examples about eligibility and limitations on HSA deductions, see IRS Publication 969 (2017), Health Savings Accounts and Other Tax-Favored Health Plans.

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 25; Form 8889
2018 Schedule 1, line 25

Alimony Paid

Updated on: Jun 22, 2018

Currently, amounts paid to a spouse or a former spouse under a divorce or separation instrument (including a divorce decree, a separate maintenance decree, or a written separation agreement) may be alimony for federal tax purposes. Alimony is deductible by the paying spouse.

 

There is no change in tax treatment for divorces signed through December 31, 2018. However, in general, for divorces signed after December 31, 2018, the spouse or former spouse paying the alimony will no longer be able to take a deduction for alimony paid.

Previous (2017)

The spouse paying the alimony gets a deduction for the amount paid.

 

Note: To qualify as alimony, payments must meet certain requirements. 

Change

Alimony and separate maintenance payments aren’t deductible by the paying spouse.
   

The repeal of the deduction for alimony and separate maintenance payments applies to any divorce or separation instrument signed after December 31, 2018, or for any divorce or separation instrument signed on or before December 31, 2018, and changed after that date, if the change clearly includes the new tax rule.

How will this affect me?

Scenario 1

Emma pays Noah $1,500 of alimony per month based on their divorce decree signed in 2016. Emma will continue to take a deduction of the same amount in tax year 2018 and in future tax years.

Scenario 2

Noah and Emma signed their divorce decree in 2018 and Noah was awarded alimony. Since they signed the divorce decree in 2018, Emma will get a deduction for the amount paid in 2018.

 

Note: If Noah and Emma had divorced after 2018, Emma wouldn’t get a deduction for the alimony she paid to Noah.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 31a
2018 Schedule 1, line 31
 

Tax and Credits

Changes in Tax Rates

Updated on: Dec 14, 2018

For 2018, most tax rates have been reduced. Additionally, the tax rates and brackets for the unearned income of a child have changed and are no longer affected by the tax situation of the child’s parents.

Previous (2017)

For 2017, there are seven federal income tax rates. The 2017 tax rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent.

 

The amount of tax you owe depends on your income level and filing status.

Change

For 2018, most tax rates have been reduced. The 2018 tax rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.

 

For 2018, the tax rates and brackets for the unearned income of a child have changed and are no longer affected by the tax situation of the child’s parents.

 

The new tax rates applicable to a child’s unearned income of more than $2,550 are 24 percent, 35 percent, and 37 percent.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 44
2018 Form 1040, line 11

Credit for Other Dependents

Updated on: Oct 10, 2018

The new tax law created a new nonrefundable credit in the amount of $500 for each qualifying dependent who isn’t a qualifying child for whom the refundable credit is allowed.

Previous (2017)

N/A

Change

For tax years beginning after December 31, 2017, and before January 1, 2026, there is a new nonrefundable $500 credit for each qualifying dependent who isn’t a qualifying child for whom the refundable credit is allowed (qualifying relatives and qualifying children who don’t meet the new requirement for a Social Security number valid for employment, which is applicable to the refundable credit). The dependent must be a citizen, national, or resident of the United States.

 

The amount of the credit isn’t annually adjusted for inflation. This credit begins to phase out for taxpayers with adjusted gross income more than $400,000 (in the case of married taxpayers filing a joint tax return) and more than $200,000 (for all other taxpayers).

How will this affect me?

Scenario 1

During 2018, Lisa lived with her mother, a U.S. citizen, for the entire year in Lisa’s home. Because her mother’s only source of income is Social Security benefits, Lisa provides well over 50 percent of her mother’s support. Lisa’s mother qualifies as her dependent, and Lisa can claim the full $500 nonrefundable credit for her mother if her income is no more than $200,000.

Scenario 2

Same as above, but Lisa’s mother doesn’t qualify as her dependent, because Lisa provides less than half of her mother’s support. Lisa can’t claim the $500 credit for her mother.

Additional information and resources:

2018 Form 1040, line 12

Retirement Savings Contributions Credit (Saver's Credit)

Updated on: Jun 26, 2018

The saver’s credit remains the same, but the AGI limitations are annually adjusted for inflation. In addition, the new tax law permits a designated beneficiary of an Achieving a Better Life Experience (ABLE) account to claim the saver’s credit for his or her contributions made to the ABLE account before January 1, 2026. 

Previous (2017)

You may be able to take a tax credit for making eligible contributions to your IRA or employer-sponsored retirement plan. To be eligible to take the credit, you must satisfy the following requirements:

 

  • Age 18 or older;
  • Not a full-time student; and
  • Not claimed as a dependent on another person’s return.

 

The amount of the credit is 50 percent, 20 percent or 10 percent of your retirement plan or IRA contributions up to $2,000 ($4,000 if married filing a joint tax return), depending on your adjusted gross income (AGI). More information about AGI limitations and applicable percentages can be found on IRS Form 8880, Credit for Qualified Retirement Savings Contributions.

Previously, beneficiaries of ABLE accounts couldn’t claim the saver’s credit for contributions made to the ABLE account.

Change

The saver’s credit remains the same, but the AGI limitations are annually adjusted for inflation. In addition, the new tax law permits a designated beneficiary of an Achieving a Better Life Experience (ABLE) account to claim the saver’s credit for his or her contributions made to the ABLE account before January 1, 2026. 

How will this affect me?

Scenario 1

During 2018, David, who is 29 years old and disabled, contributed $2,000 to his ABLE account. David’s filing status is single and his AGI $20,000. David can claim a saver’s credit of $400 (20 percent of the $2,000 contribution) on his 2018 tax return.

Scenario 2

The same as above, but David is married to Evelyn, they file a joint tax return, and their AGI is $64,000. David and Evelyn can’t claim the saver’s credit on their 2018 joint return, because their AGI is too high.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 51; Form 8880
2018 Schedule 3, line 51

Standard Deduction

Updated on: Jun 26, 2018

The standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status; there is also an additional standard deduction for individuals who are blind or age 65 or over.

 

The new tax law nearly doubled the standard deduction amounts to $12,000 for single filers, $24,000 for joint filers, and $18,000 head of household filers for tax years 2018 through 2025. The new law didn’t change the additional amounts for the blind and elderly. These amounts are adjusted annually for inflation. 

Previous (2017)

For tax year 2017, the standard deduction amounts were the following for each filing status:

 

  • Single or Married Filing Separately: $6,350
  • Married Filing Jointly or Qualifying Widow(er): $12,700
  • Head of Household: $9,350

 

An additional $1,250 or $1,550 (for Single or Head of Household) was available if the taxpayer or spouse was elderly (born before January 2, 1953) or blind. The taxpayer can take multiple additional amounts – each taxpayer or spouse could qualify for up to two additional amounts).

Change

For tax years 2018 through 2025, the standard deduction amounts are the following:

 

    Single or Married Filing Separately: $12,000
   Married Filing Jointly or Qualifying Widow(er): $24,000
   Head of Household: $18,000 

 

The same additional amounts apply for the blind and elderly ($1,300 or $1,600 for Single or Head of Household)

 

The above amounts are adjusted annually for inflation. 

How will this affect me?

Scenario 1

In tax year 2017, Ethan and Mia filed a joint tax return and claimed a total of $20,000 in itemized deductions on Schedule A. They expect to have even less itemized deductions in 2018 due to the new limitation on state taxes. They would benefit from taking a standard deduction of $24,000 on their tax year 2018 tax return. Neither qualify for the additional amounts for the blind and elderly.

Scenario 2

Same as above, but both Ethan and Mia are blind and both were born in 1950. They would both qualify for two additional amounts. Therefore, their 2018 standard deduction amount would increase by $5,200 (four additional amounts of $1,300) to a total of $29,200.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40
2018 Form 1040, line 8

Personal Exemptions

Updated on: Jun 26, 2018

An exemption is an amount you claim as a deduction against income to calculate your taxable income.

 

The new tax law reduces the personal exemption amount to zero ($0) for tax years for tax years 2018 through 2025.

Previous (2017)

You could claim an exemption for yourself, your spouse, and for each person you claim as a dependent on your tax return. In tax year 2017, you could claim $4,050 for each exemption. However, your exemptions were reduced if your adjusted gross income (AGI) was above a certain amount:

 

  • $156,900 for married individuals filing separate tax returns;
  • $261,500 for single individuals;
  • $287,650 for heads of household; and
  • $313,800 for married individuals filing joint tax returns or qualifying widow(er)s.
Change
The amount you are entitled to claim for each exemption is zero ($0) for tax years 2018 through 2025.

How will this affect me?

Scenario 1

Ben and Amelia file a joint tax return. They also have two children they claim as dependents. They expect their total AGI for 2018 to be approximately $120,000. While they may be entitled to claim four exemptions in 2018, each exemption is worth $0.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 42

Education Credits (Lifetime Learning and American Opportunity Credits)

Updated on: Jun 25, 2018

You may use IRS Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits), to figure and claim your education credits, which are based on qualified education expenses paid to an eligible postsecondary educational institution. There are two education credits.

 

  • The American Opportunity Credit, part of which may be refundable.
  • The Lifetime Learning Credit, which is nonrefundable.

 

The new tax law didn’t change either the Lifetime Learning Credit or the American Opportunity Credit reported on IRS Form 8863. The income limits for both the Lifetime Learning Credit and American Opportunity Tax Credit are subject to inflationary adjustments. 

Previous (2017)

If you, your spouse, or your dependent are enrolled in a higher education institution, you can take one (not both) of the following education credits to help cover the cost of qualified education expenses:

 

  • Lifetime Learning Credit: A nonrefundable credit for 20 percent of the first $10,000 of qualified education expenses or a maximum of $2,000 per return.

 

The credit is only available if your modified adjusted gross income (MAGI) is $66,000 or less or $132,000 or less if you are married and filing a joint tax return. The credit begins to phase out when your MAGI reaches $56,000 (or $112,000 for married taxpayers filing a joint tax return).

 

  • American Opportunity Credit: A credit for qualified education expenses paid for an eligible student pursuing a degree and in the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student.

 

The amount of the credit is 100 percent of the first $2,000 of qualified education
expenses you paid for each eligible student and 25 percent of the next $2,000 of qualified education expenses you paid for that student. But, if the credit pays your tax down to zero, you can have 40 percent of the remaining amount of the credit (up to $1,000) refunded to you. The credit begins to phase out once your MAGI reaches $80,000 ($160,000 for married taxpayers filing a joint tax return).

 

You can claim either credit for qualified education expenses paid with the proceeds of a loan. Neither credit is available if you file married filing separately. For more information on the requirements to take each credit and calculations of the amount of each credit, see IRS Publication 970, Tax Benefits for Education.

Change

The new tax law didn’t change either the Lifetime Learning Credit or the American Opportunity Credit reported on IRS Form 8863.

 

The income limits for both the Lifetime Learning Credit and American Opportunity Tax Credit are subject to inflationary adjustments. 

How will this affect me?

Scenario 1

Logan is enrolled in law school while working full time as a paralegal. The amount of tuition and fees he paid during 2018 is $10,500. His MAGI is $60,000. Logan can’t take the American Opportunity Credit because he is not enrolled in the first four years of college. He can claim a $2,000 Lifetime Leaning Credit (20 percent of the first 10,000 of eligible education expenses).

Scenario 2

Same as above, except Logan is enrolled in an undergraduate college program pursuing a degree in computer science. He is eligible to take the American Opportunity Credit and can take the full $2,500 credit.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 50 and 68; Schedule 8863
2018 Form 1040, line 17; 2018 Schedule 3, line 50

Child Tax Credit and Additional Child Tax Credit

Updated on: Jun 25, 2018

The Child Tax Credit is an important tax credit for certain taxpayers (depending on income) with qualifying children under the age of 17.

 

The new tax law made generally favorable changes to the child tax credit and additional child tax credit. The child tax credit and additional child tax credit that may be worth as much as $2,000 per qualifying child, depending upon your income.

Previous (2017)

Child tax credit allowed you to reduce your federal income tax by up to $1,000 for each qualifying child under the age of 17.

 

A qualifying child for this credit is someone who meets the qualifying criteria of six tests: age, relationship, support, dependent, citizenship, and residence.

 

The credit is limited if your modified adjusted gross income (MAGI) is above a certain amount. The amount at which this phase-out begins varies depending on your filing status. In 2017, the phaseouts began if your MAGI was at the following levels:

 

  • $110,000 for married taxpayers filing a joint tax return;
  • $55,000 for married taxpayers filing a separate tax return;
  • $75,000 for all other taxpayers.

 

In addition, the child tax credit is generally limited by the amount of the income tax you owe as well as any alternative minimum tax you owe.

 

You may be able to claim an additional child tax credit, if the amount of your child tax credit is greater than the amount of income tax you owe.

Change

The new tax law made the following changes for tax years 2018 through 2025:

 

Increases the child tax credit to $2,000 per qualifying child who hasn’t attained age 17 during the taxable year;

 

Provides the maximum amount refundable (additional child tax credit) may not exceed $1,400 per qualifying child;

 

  • After tax year 2018, the maximum amount refundable (additional child tax credit) is adjusted for inflation. 

 
 

Requires the inclusion of a social security number valid for employment for each qualifying child for whom the credit is claimed on the tax return;

 
 

Modifies the child tax credit to provide for a $500 nonrefundable credit for qualifying dependents other than qualifying children and certain qualifying children without the required type of social security number; and

 

Provides that the child tax credit begins to phase out for taxpayers at the following levels of MAGI.

 

  • $400,000 for married taxpayers filing a joint tax return,
  • $200,000 for all other taxpayers.

How will this affect me?

Scenario 1

Joseph and Ann have three children, ages 12, 14, and 17, all of whom are claimed as dependents, have social security numbers valid for employment, and who lived with their parents all year. Joseph and Ann file a joint 2018 tax return and their MAGI is $44,000. They are eligible to take $4,000 of child tax credit. If this credit reduces their tax below zero, they can take up to $2,800 of refundable additional child tax credit.

Scenario 2

The same as above, except their 2018 MAGI is above $400,000. The amount of child tax credit they may claim is subject to a phase out based on the Child Tax Credit Worksheet found in IRS Publication 972, Child Tax Credit.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 52 and 67; Schedule 8812; 2017 Form 1040, line 67
2018 Form 1040, line 12; 2018 Form 1040, line 17

Credit for Child and Dependent Care Expenses

Updated on: Jun 23, 2018

If you are a qualifying individual working or looking for work and have child and dependent care expenses, you may qualify for a credit for child and dependent care expenses. The new tax law didn’t change this credit.

Previous (2017)

You may be able to claim the child and dependent care credit if you paid expenses for the care of a qualifying individual to enable you (and your spouse, if filing a joint tax return) to work or actively look for work.

 

You may not take this credit if your filing status is married filing separately.

 

The total expenses that you may use to calculate the credit may not be more than $3,000 (for one qualifying individual) or $6,000 (for two or more qualifying individuals).

 

Expenses paid for the care of a qualifying individual are eligible expenses if the primary reason for paying the expense is to assure the individual’s well-being and protection.

 

If you received dependent care benefits that you exclude or deduct from your income, you must subtract the amount of those benefits from the dollar limit that applies to you.

 

The amount of the credit is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual.

 

The percentage depends on your adjusted gross income (AGI). Your AGI is your gross income less certain adjustments to your income and can be found on your tax return.

 

For more information on the requirements for and calculation of this credit see IRS Publication 503, Child and Dependent Care Expenses.

Change

The new tax law didn’t change this credit.

How will this affect me?

Scenario 1

Matthew and Avery are married, file a joint tax return, and have a three-year old daughter. To enable Avery to begin a new job on July 1st, they enrolled their daughter in a nursery school that provides preschool childcare. They paid $300 per month for the childcare. Matthew and Avery can use the full $1,800 they paid ($300 × six months) as qualified expenses because it is less than the $3,000 yearly limit. They calculate the amount of the credit by applying the applicable percentage based on their AGI.

Scenario 2

Matthew and Avery are married, file a joint tax return, and have a three-year old daughter. To enable Avery to begin a new job on July 1st, they enrolled their daughter in a nursery school that provides preschool childcare. They paid $300 per month for the childcare. Matthew and Avery can use the full $1,800 they paid ($300 × six months) as qualified expenses because it is less than the $3,000 yearly limit. They calculate the amount of the credit by applying the applicable percentage based on their AGI.

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 49
2018 Schedule 3, line 49
 

Other Taxes

Health Care: Individual Responsibility (Individual Shared Responsibility Payment)

Updated on: Jun 26, 2018

The new tax law didn’t change the individual shared responsibility payment (ISRP) for tax year 2018 (except for the annual inflation adjustments), but it reduced the payment to $0 for tax years after 2018.

Previous (2017)

The ISRP in the Affordable Care Act requires you, your spouse, and your dependents to have one of the following:

 

 

In general, the annual payment amount is the greater of a percentage of your household income or a flat dollar amount, but is capped at the national average premium for a bronze level health plan available through the Marketplace. You will owe 1/12th of the annual payment for each month you or your dependents don’t have either coverage or an exemption.

 

If you must make a payment, you can use the worksheets located in the instructions to IRS Form 8965, Health Coverage Exemptions, to figure the shared responsibility payment amount due.

Change
The new tax law didn’t change the ISRP for tax year 2018 (except for the annual inflation adjustments). However, it reduced the payment to $0 for tax years beginning after December 31, 2018.

How will this affect me?

Scenario 1

Anthony and Addison are married and file a joint tax return. In 2018, they had required health care coverage through June 30th. However, they didn’t have health care coverage from July 1st through the end of the year. Unless they qualify for a health coverage exemption for the months without coverage, they will need to calculate the amount of ISRP due for those months on the worksheets located in the instructions to IRS Form 8965, Health Coverage Exemptions.

Scenario 2

Same as above, except Anthony and Addison had coverage through October 31st and didn’t have health care coverage for the last two months of the year. They qualify for an exemption due to a short coverage gap and report this exemption on IRS Form 8965, Health Coverage Exemptions. Because they qualify for an exemption, they don’t need to report the ISRP on their 2018 tax return.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 61
2018 Schedule 4, line 61
 

Payments

Premium Tax Credit

Updated on: Jun 26, 2018

The new tax law didn’t change the premium tax credit. However, there are inflationary adjustments to the cap on the repayment of any excess advance premium tax credit received. 

Previous (2017)

The premium tax credit – also known as PTC – is a refundable credit that helps eligible individuals and families cover the premiums (payments) for their health insurance purchased through the Health Insurance Marketplace. To claim the credit, you must meet the following eligibility requirements:

 

  • Have household income that falls within a certain range. To be eligible for the premium tax credit, your household income must generally be at least 100 – but no more than 400 – percent of the federal poverty line for your family size.
  • Don’t file a tax return using the filing status of Married Filing Separately. There’s an exception to this rule that allows certain victims of domestic abuse and spousal abandonment.
  • Can’t be claimed as a dependent by another person.
  • Meet these additional requirements: In the same month, you or a family member:
    • Have health insurance coverage through a Health Insurance Marketplace.
    • Can’t get affordable coverage through an eligible employer-sponsored plan that provides minimum value.
    • Aren’t eligible for coverage through a government program, like Medicaid, Medicare, CHIP or TRICARE.
    • Aren’t enrolled in group coverage designated by HHS as minimum essential coverage such as health coverage offered by a college or university to its students.
    • Pay the share of premiums not covered by advance credit payments.

 

When you enroll, the Marketplace will determine if you’re eligible for advance payments of the premium tax credit, also called advance credit payments. Advance credit payments are amounts paid to your insurance company on your behalf to lower the out-of-pocket cost for your health insurance premiums.

 

If you get the benefit of advance credit payments in any amount – or if you plan to claim the premium tax credit – you must file a federal income tax return and attach IRS Form 8962, Premium Tax Credit, to your return. You claim the premium tax credit and reconcile the credit with the amount of your advance credit payments for the year on IRS Form 8962.

Change

The new tax law didn’t change the premium tax credit. However, there are inflationary adjustments to the cap on the repayment of any excess advance premium tax credit received. 

How will this affect me?

Scenario 1

Sidney and Nan are married and plan to file a joint tax return for tax year 2018. They were both enrolled in coverage through the Marketplace for all of 2018 and advance payments of the premium tax credit (APTC) were made for this coverage. They must file a 2018 tax return and attach IRS Form 8962, Premium Tax Credit, on which they will reconcile the amount of APTC received to the amount of the PTC to which they are entitled. If the amount of the PTC is less than the amount of the APTC, they must repay the difference on their 2018 tax return, subject to a repayment limit for taxpayers with household income below 400 percent of the federal poverty line for their family size. If their PTC is more than the APTC paid on their behalf, the difference reduces their tax liability or results in a refund to the extent it is more than their tax liability.

Scenario 2

Same as above, except APTC payments weren’t made for Sidney and Nan’s coverage through the Marketplace. They should file their 2018 joint tax return and attach IRS Form 8962, Premium Tax Credit, to calculate the PTC to which they are entitled to claim on their return. 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 69
2018 Schedule 5, line 70

Earned Income Tax Credit

Updated on: Jun 22, 2018

The Earned Income Tax Credit, EITC or EIC, is a benefit for working people with low to moderate income. To qualify, you must meet certain requirements and file a tax return, even if you do not owe any tax or are not required to file. EITC reduces the amount of tax you owe and may give you a refund.

 

The new tax law didn’t change the earned income tax credit. However, the earned income amounts and phase-out amounts are adjusted annually for inflation. 

Previous (2017)

The earned income tax credit (EITC) is a tax credit for individuals who work and whose earned income is within a certain range. You must meet certain eligibility rules to claim and receive the credit:

 

 

You, your spouse (if applicable), and all listed qualifying children must have social security numbers. In addition, you aren’t eligible for the credit if your filing status is married filing separately. The amount of the credit depends on your earned income, filing status, whether you have any qualifying children.

 

The IRS offers an application, EITC Assistant, that can assist you in determining if you are eligible for the credit and estimating the amount of your credit. The application is available in English and Versión en Español. You can use the EITC Assistant for the current tax year or for prior years.

Change

The new tax law didn’t change the earned income tax credit. However, the earned income amounts and phase-out amounts are adjusted annually for inflation. 

How will this affect me?

Scenario 1

Anthony and Addison are married and plan to file separate 2018 tax returns. They both live in the same residence and fully support their children who are qualifying children. Even if their earned income falls within the range for the credit, Anthony and Addison can’t claim the EITC on their 2018 tax returns because of their married filing separate status.

Scenario 2

Same as above, except Anthony and Addison married filing joint tax return. In addition, their children are foster children who were placed in their house on March 15, 2018 and remained throughout the year. Foster children meet the relationship test for a qualifying child. Assuming the children meet all the requirements to be qualifying children, and their earned income falls with the allowable range for EITC, they’ll be eligible to claim the EITC on their 2018 joint tax return.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 66a
2018 Form 1040, line 17
 

Itemized Deductions (Schedule A)

Mortgage Interest

Updated on: Jun 26, 2018

If you got a mortgage on or before December 15, 2017, the new tax law doesn’t change the amount of your deductible mortgage interest.

 

However, if you got a mortgage (for a first or second home) after that date, effective for tax years 2018 through 2025, you can only deduct the interest you paid on the first $750,000 of the debt (amount you owe the mortgage company).

 

In addition, the new tax law also eliminates the deduction for interest on home equity debt.

Previous (2017)

You could deduct as an itemized deduction any interest paid on a mortgage to buy, build, or improve your principal home and a second home, if the debt totaled $1 million or less ($500,000 or less if you were married, but filed a separate tax return).

 

You were also allowed to deduct interest paid on home equity debt (not used to buy, build, or improve a first or second home) if the debt totaled $100,000 or less ($50,000 or less if you were married, but filed a separate tax return) and totaled no more than the fair market value of your home (reduced by the debt). Debt is the amount you owed on the home.

Change

For mortgages entered into after December 15, 2017, the new tax law reduced the amount of interest you can deduct as an itemized deduction to the amount accruing on no more than $750,000 of debt used to buy, build, or improve your principal home and a second home ($375,000 in the case of married taxpayers filing separate tax returns) for tax years 2018 through 2025.

 
 

The debt must be secured by the specific home the debt was used to buy, build, or improve and may not exceed the value of the home. If you acquired the debt on or before December 15, 2017, the home acquisition debt limit remains at $1,000,000 ($500,000 in the case of married taxpayers filing separate tax returns).

 
The new tax law also removes the deduction for interest on home equity debt for tax years 2018 through 2025. A home equity loan, home equity line of credit, or second mortgage is not home equity debt if you use the proceeds to buy, build, or improve a first or second home.

 

How will this affect me?

Scenario 1

James and Madison are married and file a joint tax return. They got a mortgage totaling $900,000 in 2016 to buy their first home. They also took out a home equity loan of $50,000 in June 2017 to build a deck and do other home improvements for their home. For their 2018 tax return, they can still claim all their interest payments for both loans as itemized deductions provided both loans are secured by the home and the total loan balance doesn’t exceed the value of the home. The new $750,000 limit doesn’t apply because both loans were taken out before December 15, 2017.

Scenario 2

Same as above, but James and Madison use the proceeds of the $50,000 home equity loan to pay off their credit cards, student loans, and other personal expenses. The home equity loan is now home equity debt because the proceeds were not used to buy, build, or improve their home. The interest is not deductible on their 2018 tax return under the new law.

Scenario 3

Same as above, but James and Madison got their mortgage on December 31, 2017. They’ll only be able to deduct the interest that accrues on the first $750,000 of their mortgage on their 2018 tax return.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40; 2017 Schedule A, line 10
2018 Form 1040, line 8; 2018 Schedule A, line 8

Casualty and Theft Losses

Updated on: Jun 26, 2018

The new tax law suspends casualty and theft loss deductions for tax years 2018 through 2025, except for losses attributable to any to federally declared disaster.

Previous (2017)

For tax years ending before 2018, you could deduct as an itemized deduction any personal casualty or theft loss to the extent you weren’t compensated by insurance or otherwise if the loss exceeded $100 per casualty and the net total loss exceeded 10 percent of your adjusted gross income (AGI).

 

For disaster losses in a federally declared disaster area, you could elect to deduct the casualty loss in the tax year immediately preceding the tax year in which the disaster occurred. If you suffered a casualty loss because of Hurricane Harvey, Irma, or Maria, you should read the IRS resources listed below for special rules and relief.

Change
 The new tax law provides that, for tax years 2018 through 2025, you can’t deduct your personal casualty or theft losses (not compensated by insurance or otherwise) unless it is a casualty loss attributable to a federally declared disaster.

 

The loss must still exceed $100 per casualty and the net total loss must exceed 10 percent of your AGI. In addition, you can still elect to deduct the casualty loss in the tax year immediately preceding the tax year in which the disaster occurred.

How will this affect me?

Scenario 1

Elijah and Charlotte own a home in Maryland which had $10,000 in damage to their siding due to a hail storm in March 2018. Their insurance paid $5,000 of the loss. The President never declared the storm a federal disaster. Therefore, they can’t deduct any of the $5,000 loss that wasn’t compensated by their insurance company.

Scenario 2

Same as above, except the hail damage was part of a storm which the President declared a federal disaster. Elijah and Charlotte may be able to deduct the $5,000 loss that wasn’t compensated by insurance as an itemized deduction in 2017 or 2018 provided the $5,000 loss exceeds 10 percent of their AGI.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40; 2017 Schedule A, line 20
2018 Form 1040, line 8; 2018 Schedule A, line 15

Taxes You Paid (Including State and Local, Income, Real Estate, and Personal Property Taxes)

Updated on: Jun 26, 2018

The new tax law limits the amount of the itemized deduction you can take for state and local taxes (SALT) to $10,000 per year ($5,000 in the case of a married individual filing a separate tax return) for tax years 2018 through 2025.

Previous (2017)

Other than the general phase-out of itemized deductions based on your adjusted gross income, there wasn’t a dollar limitation on the amount of state and local taxes you could take as an itemized deduction. You could claim the following types of nonbusiness taxes as an itemized deduction:

 

  • State, local and foreign income taxes;
  • State, local and foreign real estate taxes;
  • State and local personal property taxes; and
  • State and local general sales taxes.
Change
For tax years 2018 through 2025, you can only claim an itemized deduction for state and local income, real estate, personal property, and general sales taxes a combined amount up to $10,000 ($5,000 for married taxpayers filing separate returns).

How will this affect me?

Scenario 1

Alex and Abigail are married, file a joint tax return, and typically itemize their deductions due to the amount of state and local income and real estate taxes they pay. They expect their state and local taxes to be approximately $15,000 in tax year 2018. They expect the remainder of their itemized deductions to be approximately $12,000. They’re only allowed to claim $10,000 as a deduction for state and local taxes. Therefore, they’ll benefit by taking the standard deduction on their 2018 tax return because their total itemized deductions of $22,000 is less than the $24,000 standard deduction available to them if they file a joint tax return.

Scenario 2

The same as above, except the remainder of their itemized deductions is $16,000. In this case, their total itemized deductions of $26,000 is more than the standard deduction of $24,000 that is available to them. They’ll benefit by claiming itemized deductions rather than the standard deduction.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40; 2017 Schedule A, line 9
2018 Form 1040, line 8; 2018 Schedule A, line 7

Job Expenses and Certain Miscellaneous Deductions

Updated on: Jun 25, 2018

Miscellaneous expenses include unreimbursed employee business expenses, tax preparation fees, and other miscellaneous fees.

 

Based on the new tax law, for tax years 2018 through 2025, you’re no longer allowed to take an itemized deduction for the miscellaneous expenses subject to two percent of your adjusted gross income (AGI).

 

Your AGI is your gross income less certain adjustments to your income and can be found on your tax return.

Previous (2017)

You could deduct certain miscellaneous expenses as itemized deductions to the extent they collectively exceeded two percent of your adjusted gross income (AGI).

 

These miscellaneous expenses include unreimbursed employee business expenses such as home office deduction, tax preparation fees, and certain other expenses.

Change

The new tax law eliminated the miscellaneous itemized deductions subject to the two percent of your AGI.
 

Therefore, you can no longer deduct any unreimbursed employee business expenses, tax preparation fees, or certain other expenses.

 

How will this affect me?

Scenario 1

Aiden started a new job as a cybersecurity analyst in 2018. He wanted to stay on top of the latest advances in his field so he paid $2,500 for training classes provided by a reputable trade association in his field. Aiden’s employer didn’t reimburse him for the training expenses. He expects to report an AGI of approximately $65,000 on his 2018 tax return. Aiden won’t be able deduct these expenses as an itemized deduction on his 2018 tax return even though they exceed two percent of his expected AGI.

Scenario 2

Chloe typically gets her tax returns prepared by a local tax return preparer, who is known to charge high preparation and filing fees. Because Chloe will no longer be able to include this expense as an itemized deduction (subject to two percent of her AGI), she will need to rethink her return preparation options in 2018.

Scenario 3

Lisa works for an IT corporation and her employment agreement requires her have a home office. Lisa works most of her work week out of her home office. Beginning in tax year 2018, Lisa will no longer be able to take an itemized deduction for her home office expenses because the new law eliminated the deduction for unreimbursed employee business expenses.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40; 2017 Schedule A, line 21 and 27
2018 Form 1040, line 8

Medical and Dental Expenses

Updated on: Jun 25, 2018

Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.

 

Medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness.

 

Medical expenses include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.

 

The new tax law temporarily reduces the percentage of your adjusted gross income (AGI) that you must exceed before you can deduct medical and dental expenses as an itemized deduction.

 

The new law reduced the percentage from 10 percent to 7.5 percent of your AGI for tax years 2017 (retroactive) and 2018. Therefore, more people may qualify to take this deduction than in the past.

 

Your AGI is your gross income less certain adjustments to your income and can be found on your tax return.

Previous (2017)

Before the new tax law, you could deduct as an itemized deduction qualified medical and dental expenses that exceeded 10 percent of your AGI.

Change
 

The new law retroactively applies to tax year 2017 as well as tax year 2018.

 
For these tax years, you can deduct as an itemized deduction qualified medical and dental expenses that are more than 7.5 percent of your AGI.

How will this affect me?

Scenario 1

Michael incurs $9,000 in qualifying medical and dental expenses during tax year 2018. He files single filing status on his tax return and his AGI is $100,000. Michael plans to itemize his deductions because they exceed the new increased applicable standard deduction amount.

Scenario 2

Michael can claim a $1,500 ($9,000 minus $7,500 which is 7.5 percent of AGI) itemized deduction for medical and dental expenses in tax year 2018. He may also consider amending his tax year 2017 tax return if he incurred substantial medical and dental costs in 2017 and the new 7.5 percent floor would allow him to increase his itemized deductions.

Scenario 3

Same as above, but Michael only expects to have $10,000 total itemized deductions, including the $1,500 for medical and dental expenses. Michael would choose to take the standard deduction of $12,000 instead of itemizing his deductions. Therefore, he wouldn’t take a deduction for medical and dental expenses.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40; 2017 Schedule A, line 4
2018 Form 1040, line 8; 2018 Schedule A, line 4

Overall Limit

Updated on: Jun 25, 2018

Your itemized deductions are no longer limited, if your adjusted gross income (AGI) is over a certain amount.

The new law suspends the overall limit on itemized deductions for tax years 2018 through 2025. Your AGI is your gross income less certain adjustments to your income and can be found on your tax return.

Previous (2017)

Before 2018, your itemized deductions were limited, if your AGI was more than the following amounts:

 

  • $156,900 for married filing separately
  • $261,500 for single
  • $287,650 for head of household
  • $313,800 for married filing jointly or qualifying widow(er)

 

In the past, if your AGI was more than the applicable AGI amount, you reduced your overall itemized deduction amount by completing the Itemized Deductions Worksheet.

Change
The new tax law eliminates the AGI limitations on the total itemized deduction amount.

 

How will this affect me?

Scenario 1

Jayden and Ella are both doctors and file joint income tax returns. Their 2018 AGI is expected to be approximately $550,000 and they expect to have total itemized deductions of approximately $90,000. They’ll not need to reduce their total itemized deductions on their 2018 tax return based on their expected AGI.

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40; 2017 Schedule A, line 29

Charitable Contributions

Updated on: Jun 23, 2018

A charitable contribution is a voluntary donation or gift to a qualified organization. It is made without getting, or expecting to get, anything of equal value.

 

The new tax law increases the amount of cash contributions you can deduct as an itemized deduction from 50 percent of your adjusted gross income (AGI) to 60 percent for tax years 2018 through 2025. Your AGI is your gross income less certain adjustments to your income and can be found on your tax return.

 

The new tax law keeps the deduction limit for contributions of appreciated property at 30 percent of your AGI. It also keeps the five-year carry-forward period for charitable deductions.  

 

Note: Appreciated property is real, personal, or intangible property assets that have greater value than what you originally paid for them. Intangible property can’t be touched, but they have value. Some examples include patents and copyrights.

Previous (2017)

Previously, you were only allowed to deduct cash contributions to qualifying organizations up to 50 percent of your AGI. This 50 percent limit on cash contributions was limited to 30 percent for certain private foundations.

 

The deduction limit for contributions of appreciated property was limited to 30 percent of AGI. In addition, you could carry-forward any amounts that exceeded the AGI thresholds for five-years (on future tax returns).

Change
For tax years 2018 through 2025, you can deduct an itemized deduction for cash contributions to qualifying organizations up to 60 percent of your AGI.

 

 

For contributions of appreciated property, your deduction is limited to 30 percent of AGI. You can carry-forward for five years (on future tax returns) any amounts that exceed the AGI thresholds.

How will this affect me?

Scenario 1

Daniel owns a business. In 2018, he donated the $55,000 he inherited from his grandmother to his church. Daniel plans to file a file a tax return using single filing status and he expects his AGI in 2018 to be approximately $100,000. Daniel should be able to deduct the entire cash contribution as an itemized deduction because it is less than 60 percent of his expected AGI.

Scenario 2

Same as above, but Daniel’s expected 2018 AGI is $80,000. Daniel will only be allowed to deduct as a charitable contribution $48,000 (60 percent of his AGI).

 

Additional information and resources:

Where to find it on the tax return:

2017 Form 1040, line 40; 2017 Schedule A, line 19
2018 Form 1040, line 8; 2018 Schedule A, line 14