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Tax Changes To Be Aware Of When Filing Your 2018 Tax Return

Photo of Cathy Collins
Cathy Collins

Due to the Tax Cuts and Jobs Act (TCJA) you will likely notice a number of changes when preparing your 2018 tax return. This article will discuss the new tax rates, elimination of the personal exemption, the increase in the standard deduction, and changes to certain itemized deductions.

Tax Rates

The federal income tax is a progressive tax, meaning those with the lowest taxable income also have the lowest tax rate. In contrast, those with the highest taxable income have the highest tax rate. The following chart shows a comparison of the tax rates between 2018 and 2017 for a taxpayer filing as Single. A number of tax rates were reduced for 2018. Interestingly, some of the income brackets were significantly changed from 2017 to 2018 while others were only adjusted to account for inflation. A taxpayer filing as Single with taxable income of $210,000 in both 2017 and 2018, will see a 2% increase in her tax rate for 2018. In comparison, a taxpayer filing as Single with taxable income of $420,000 in both years, will see a 4.6% decrease in her 2018 tax rate. Thus, the new tax brackets and rates will benefit certain taxpayers while disappointing others.

2018 tax rate

2018 taxable income bracket

2017 tax rate

2017 taxable income bracket

10%

$0 to $9,525

10%

$0 to $9,325

12%

$9,526 to $38,700

15%

$9,326 to $37,950

22%

$38,701 to $82,500

25%

$37,951 to $91,900

24%

$82,501 to $157,500

28%

$91,901 to $191,650

32%

$157,501 to $200,000

33%

$191,651 to $416,700

35%

$200,001 to $500,000

35%

$416,701 to $418,400

37%

$500,001 or more

39.6%

$418,401 or more

Elimination of the Personal Exemption

In the past, taxpayers claimed a personal exemption for themselves, their spouse, and certain dependents. In 2017, the personal exemption was $4,050 per person. A family of five was able to deduct $20,250 from their taxable income, provided adjusted gross income was below a certain threshold. For 2018, the personal exemption deduction has been eliminated.

Increase in Standard Deduction

For 2018, the standard deduction increased across all filing statuses. Given that taxpayers are entitled to deduct the larger of their standard deduction or itemized deduction, this change should reduce the number of individuals having to prepare a Schedule A tax form determining their itemized deduction. For those filing as Single, the standard deduction has increased from $6,500 to $12,000. For those filing as Married Filing Jointly, the standard deduction has increased from $13,000 to $24,000.

Changes to Itemized Deductions

Previously, the interest on home equity loans used to pay for college education, pay off credit card debt, cover unexpected bills, etc. was deductible. With the TCJA, that deduction has been eliminated.

Next, a limit has been imposed on the deduction for state and local taxes. Under the TCJA, property taxes and state and local income taxes, or sales tax, if greater, are now limited to a combined total deduction of $10,000. A taxpayer filing Married Filing Jointly with real estate taxes of $7,000, additional real estate taxes of $3,000 on a vacation home, and Illinois income tax withholding of $5,000 would have been entitled to a $15,000 deduction in 2017 but will now be limited to a $10,000 deduction.

The new law eliminated the itemized deduction for job expenses and certain miscellaneous deductions, that were previously deductible to the extent they exceeded 2% of adjusted gross income. Thus, taxpayers can no longer deduct union dues, tax preparation fees, dues to professional societies, and work-related education expenses to name a few.

Given the new increased standard deduction of $24,000 for Married Filing Jointly, the $10,000 state and local tax limitation, and other changes to itemized deductions, more taxpayers will take the standard deduction because it exceeds their itemized deduction. These changes will certainly impact taxpayers’ decisions going forward. For instance, charitable organizations are wondering whether donors, who no longer take the itemized deduction, will continue to contribute, if their donations do not reduce their taxes. Look for these and other differences when comparing your 2018 return with your 2017 federal tax return.

Cathy Collins, Professor of Accounting

March 8, 2019