Changes to the Tax Laws for the 2018 Tax Season
The US tax code is both complicated and ever changing. Each year Congress makes adjustments for inflation, enacts laws, and makes changes to deductions or credits, impacting your return. Some years the changes are small and others dramatic. 2017 did not major changes in the tax code. However, there are a number of adjustments, which impact the majority of tax filers.
The tax changes apply to income earned in 2017 and taxes filed in the spring of 2018.
Inflation Adjustments
Personal Exemption is an amount a taxpayer can claim as a deduction on returns to reduce taxable income. The personal exemption for 2017 remained unchanged at $4,050. You receive one exemption for each dependent on the tax return. Almost everyone benefits from the personal exemption.
The exemption only declines for high earners. Single filers with income over $384,000, and married couples who file a joint tax return, and earn over $436,300, may not qualify.
Standard Deduction is available, in addition to the personal exemption. In 2017, there was an inflation increase for everyone. You choose to take the standard deduction or itemize deductions, whichever offers the highest benefit. The standard deduction directly reduces taxable income and offers a simpler return than those who choose to itemize.
The deduction varies based on your tax filing status. Table A illustrates the differences in standard deductions from 2016 Tax Year to the 2017 Tax Year.
| Status | Deduction Amount 2017 Tax Year | Deduction Amount 2016 Tax Year |
|---|---|---|
| Married filing jointly | $12,700 | $12,600 |
| Married filing separately | $6,350 | $6,300 |
| Head of Household | $9,350 | $9,000 |
The Earned Income Tax Credit, often referred to as the EIC or EITC, is a refundable tax credit aimed at helping low to moderate income earners. The tax credit directly lowers your tax bill. With the EITC, you can receive a refund, even if you do not owe the full amount of the credit.
The EITC credit is most beneficial for those with children. However, low wage earners without children can also receive a credit. For example, a single filer earning less than $15,010, you can receive a credit up to $510.
Congress raised the maximum amount you can receive from last year. Table B illustrates the maximum payouts based on filing status and the number of dependents. If income surpasses IRS established thresholds, you will not qualify for the credit.
| Number Of Children | Single, Head of Household, or Widowed Workers With Income Less Than: | Married Filing Jointly With Income Less Than: | EITC up to: |
|---|---|---|---|
| 3+ children | $48,340 | $53,930 | $6,318 |
| 2 children | $45,007 | $50,198 | $5,616 |
| 1 child | $39,617 | $44,846 | $3,400 |
| None | $15,010 | $20,600 | $510 |
Deduction for Foreign Income. Earning money overseas can come from investments, through interest on overseas bank accounts, or citizens living and working abroad. Most tax filers can exclude foreign earnings, lowering taxable income. The exclusion for the 2017 Tax Year is $102,100, which is a $200 increase from the previous year.
Estate Tax Limits provide an inheritance free of federal taxes, within designated limits. The basic exclusion is $5,490,000, which increased by $40,000 from 2016. States often begin taxing inheritances at much lower dollar amounts.
Health Care Savings Account or HSA Maximum Contribution
To qualify for an HSA account, you must maintain health insurance with a minimum deductible of $1,300 for an individual and $2,600 for a family, which is the same as 2016. Maximum out of pocket expenses on the policy must be $6,550 for one person and $13,100 for families.
Family contributions limits remain at $6,750, and single accounts received an increase of $50 to $3,400 from $3,350.
Health Insurance Tax (link)
Federal law still requires you to maintain health insurance coverage or pay a tax penalty. The penalty increases each year and in 2017, rose to the higher of $695 per person or 2.5% of household income. When your employer does not provide a work insurance plan, you can register for an individual plan through the Marketplace.
Most small business owners can deduct health insurance and long-term care premiums on your tax return. The benefit for businesses is a tax benefit without having to meet the 10% threshold typically required before deducting medical expenses. Companies providing health insurance to employees may also be eligible for a tax credit.
Treatment of Offshore Accounts
Based on the amount of money you maintain in foreign accounts, you can potentially avoid reporting the money to the IRS.
If you are filing as a single for the 2017 Tax Season, you can have up to $50,000 in deposits on December 31, 2017. You can also have a balance of up to $75,000 at any point during the year in an offshore account without filing with the IRS.
As a married couple filing jointly, you can maintain up to $75,000 by the end of 2017 without reporting it to the IRS, and keep balances up to $150,000 at any point throughout the year.
Single expats can have a balance of up to $200,000 on December 31 and no more than 300,000 at any point. Couples filing a joint return have increased thresholds up to 400,000 at year end and no more than 600,000 at any time during to avoid IRS oversight.
Changes to Itemized Deductions
Medical Expense Deductions rose from 7.5% to 10% of adjusted gross income for seniors.
Mileage Deduction applies to the number of miles you drive a car for business purposes, moving, medical appointments, and volunteering. The mileage deduction dropped to 53.5 cents for each mile driven, from 54 cents a mile, applying to miles driven for business. For moving and medical miles you now receive 17 cents per mile as opposed to the previous 19 cents per mile driven. The write off for miles driven for volunteer proposed falls to 14 cents per mile.
To claim the deduction, you must maintain a written record of miles drive.
Depreciation: Bonus depreciation allows you to claim a percentage of the purchase price of assets in the year you buy it. The deduction lowers taxable income immediately, rather than spread the full cost of the asset out over multiple years. You deduct the remaining depreciation based on the regular schedule.
Bonus depreciation rules extend through 2019. For 2017 the amount remains at half the total cost. In 2018, the deduction will fall to 40% and then to 30% in 2019.
Medicare Surcharges
There is a Medicare surtax of 3.8% on the lesser of net investment income or modified adjusted gross income above $200,000 for individuals and $250,000 for joint filers.
There is also an additional payroll tax of 0.9% on earned income above $200,000 for individuals and $250,000 for joint filers.
Understanding changes in credits, deductions, and penalties you help you prepare for the tax season and limit what you owe the IRS. To maximize benefits, you must maintain a written record and receipts for qualified deductions.