2018 Tax Changes

The new U.S. tax law is surprisingly unpopular as almost every household will pay less in tax. And over time the corporate tax reforms will lead to more capital accumulation, higher productivity, and higher real wages, raising pre-tax incomes as well as lowering the share of incomes taken in taxes.

According to the new updates from the IRS and major tax reform passed by Congress, these changes may significantly alter your situation for the 2018 tax year. The IRS unveils its changes each year, including cost-of-living adjustments for retirement savings and inflation changes for certain tax provisions. Those updates, coupled with new rules passed by Congress through the Tax Cuts and Jobs Act, could result in a big difference in how much you owe.

The bill was a major reform of the corporate tax code, lowering the corporate rate from 35% which is the highest in the industrial world, to 21% and following all other countries in adopting the “territorial” system of taxing foreign subsidiary profits, thus ending the tax penalty on repatriation of foreign profits. By removing the penalty on repatriating the earnings of the foreign subsidiaries of U.S. corporations that has trapped $2.5 trillion of earnings abroad, this reform will encourage companies to bring those funds back to the United States.

Changes that could affect you

• Standard deductions: Those who are married and filing jointly will have an increased standard deduction of $24,000, up from the $13,000 it would have been under previous law. 

Single taxpayers and those who are married and file separately now have a $12,000 standard deduction, up from the $6,500 it would have been for this year prior to the reform.

For heads of households, the deduction will be $18,000, up from $9,550.

• Personal exemption: The personal exemption has been eliminated with the tax reform bill.

• Top income tax rate: A new 37 percent top rate will affect individuals with incomes of $500,000 and higher. The top rate kicks in for married taxpayers who file jointly at $600,000 and up.
• Estate tax: The estate exemption doubles to $11.2 million per individual and $22.4 million per couple in 2018.
• Child tax credit: The child tax credit has been raised to $2,000 per qualifying child, those who are under 17, up from $1,000. A $500 credit is available for dependents who do not get the $2,000 credit.
• Mortgage interest: The deduction for interest is capped at $750,000 for mortgage loan balances taken out after Dec. 15 of last year. The limit is still $1 million for mortgages that were established prior to Dec. 15, 2017.
• State and local taxes: The itemized deduction is limited to $10,000 for both income and property taxes paid during the year.
• Contribution limits for retirement savings: Employees who participate in certain retirement plans ‒ 401(k), 403(b) and most 457 plans, and the Thrift Savings Plan can now contribute as much as $18,500 this year, a $500 increase from the $18,000 limit for 2017.
• Savings in IRAs: Savers who contribute to individual retirement accounts will have higher income ranges following cost-of-living adjustments. Note that the deduction phases out for individuals and their spouses who are covered by workplace retirement plans.

For single taxpayers, the limit will be $63,000 to $73,000.

For married couples, the phase out range will vary depending on whether the IRA contributor is covered by a workplace retirement plan or not. When the spouse who is investing has access to an employer plan, the range is $101,000 to $121,000. 

For individuals who don't have a retirement plan but are married to someone who does, the phase out has been raised to $189,000 to $199,000.

The phase out was not adjusted for married individuals who file a separate return and who are covered by a workplace retirement plan. That range is $0 to $10,000.

• Contributions to Roth IRAs: For individuals who are single or the heads of their households, the income phase out has been raised to $120,000 to $135,000. For married couples who file jointly, the range climbs to $189,000 to $199,000.

With the passage of time, people as well as the current sceptics will see that the tax reform is better than they now think.