2018 Tax Update - Part I - General Changes to Individual Returns

This is the first article in a four part series of articles about the 2018 tax law changes and how they will affect individual and business returns filed in 2019.

Fundamental to all of the individual changes is an increasing standard deduction which jumps up to $12,000 for single filers and $24,000 for couples filing jointly. Although this may seem like a large increase, it is at least partially offset by the fact that personal exemptions were ELIMINATED.

If you have eligible dependent children the Child Tax Credit has increased to $2,000 and other dependents may be eligible for the new $500 Dependent Tax Credit. This is a substantial increase and also comes with the added bonus that the income phase out limit has increased significantly. So, if you previously lost the Child Tax Credit due to taxable income over the threshold, there is a good chance that you may now be eligible again.

Schedule A itemized deductions will still be a factor for many taxpayers, although there have been radical changes to the rules governing these deductions. Many itemized deductions have been eliminated but three of the most popular, mortgage interest, state income and property taxes, and charitable deductions, all remain; albeit with changes to each one. Let’s look at how each of these have changed:

• Mortgage interest is deductible on principal loan balances up to $750,000, which is down from the previous limit of $1,000,000. (Loans originated before the 2018 tax law was passed are grandfathered under the higher limitation.) However, the deduction for interest paid on a HELOC balance (unless the funds were directly used to buy, build, or substantially improve your home) has been ELIMINATED.​
• State and local income and property taxes (SALT) continue to be deductible on your 2018 return. However, they are now CAPPED at $10,000. So, if you have $7,000 of state income tax paid and $5,000 of property taxes paid, your total deduction of $12,000 will be reduced by $2,000. This will affect many taxpayers here in GA and many more in higher tax states around the country. (To that point, New York, New Jersey, Connecticut, and Maryland just filed a lawsuit against the federal government a few weeks ago arguing against the application of this part of the new tax law. Click here for a good article at Forbes about the lawsuit and the rationale behind it.)
• Charitable deductions continue to be fully deductible under the new tax code and the income limitation has actually  increased from 50% of AGI to 60% of AGI. The greatest impact on this issue will be the increased standard deduction mentioned above. If your total itemized deductions don’t get you over the standard threshold, then the charitable deduction will be a moot point. If you reside in GA, you may still want to compare your federal itemized deductions to the GA standard deduction since the GA deduction (which also recently increased) still remains much lower than the federal deduction. If you are on the bubble between itemizing and taking the standard deduction it provides a planning opportunity, and it may make sense to lump your charitable donations into one tax year or another. E.g. If you normally give a certain charitable organization $5,000 each year, it may make sense to give them $10,000 one year and $0 the next, allowing you to claim itemized deductions in year one and switching to the standard deduction in year two.

These are just a few of the many, many ways the tax code has changed. Stay tuned for more throughout the rest of the year.

This is general information and a brief summarization of complicated tax issues which are often subject to many exclusions and limitations. We make every effort to verify the accuracy of all information but we do not guarantee or warranty advice disseminated over the internet. Please give us a call to discuss potential strategies and ensure they make sense for your specific situation.