“The hardest thing in the world to understand is the income tax.” ~Albert Einstein
Tax Cuts and ‘Reform’ for 2018
The Tax Cuts and Jobs Act was passed and signed into law on December 22, 2017, effective for the 2018 tax year. The Tax Cuts and Jobs Act of 2017 made significant changes to the tax code affecting individuals, businesses, and tax-exempt organizations. It is the first major tax reform legislation in more than 30 years.
The IRS estimates that implementation will require creating or revising approximately 450 forms, publications, and instructions. This is in progress.
The Arizona legislature’s session begins January 15, 2019. At this time, they will consider what the 2018 Arizona tax law will be.
Government Shutdown Updates
With the government shutdown come additional challenges. Ninety percent of IRS employees are furloughed/not working.
As a result, IRS resolutions are not happening right now. Also, the processing of returns, as well as Tax refunds, might be late.
New Tax Rates
Corporations now have a lower flat rate of 21%. Individuals have mostly minor rate changes.
Standard Deduction and Personal Exemption
The standard deduction has roughly doubled for all filers. This does not help as much as it sounds. That’s because the personal exemptions have been eliminated. Also, most miscellaneous itemized deductions have been eliminated.
There are only minor changes. It is likely you will not notice the impact on your tax return. The 3.8% net investment income tax that applied to high earners stays the same.
Tax Breaks for Parents
As mentioned, the personal exemption is going away, which could disproportionately affect larger families. However, this loss and more could be made up for by the expanded tax credit for qualified children younger than 17, up to $2,000 per child.
If your children are 17 or older or you take care of elderly relatives, you may be able to claim a nonrefundable $500 credit, subject to income thresholds.
The Child and Dependent Care Credit, which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable. You can’t use both of these breaks to cover the same child care costs, but depending on total multiple-child care costs, many parents can take advantage of both of these.
Education Tax Breaks
The American Opportunity Credit, the Lifetime Learning Credit, and the Student Loan Interest Deduction are still in place. So is the exclusion for graduate school tuition waivers. One significant change is that the bill expands the available use of funds you’ve saved in a 529 college savings plan. The funds can now be used to a limited extent for elementary and secondary school expenses.
Mortgage Interest, Charitable Contributions, and Medical Expenses
Mortgage interest deductions for mortgages taken after December 15, 2017 can only be taken on mortgages up to $750,000, down from $1,000,000. Home equity loan interest deductions are now limited to loans used for home purchase, repairs, and improvements.
Charitable contribution deductions are almost the same, except you can now deduct donations of up to 60% of your income, up from 50%, with a few new exceptions.
The threshold for the medical expenses deduction has been reduced from 10% of your adjusted gross income (AGI) to 7.5% of the AGI through 2018.
Deductions That Are Disappearing
While many deductions are remaining under the new tax law, there are several that didn’t survive. Gone for the 2018 tax year are the deductions for:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Investment advisory fees
- Other miscellaneous deductions previously subject to the 2% AGI cap
- Moving expenses
This is only the tip of what has and has not changed. We at Eckelberg & Wienshienk are here to guide you through the changes as the details become available.
The Obvious Problem
The legislation was thrown together very quickly, with no public input. The last reform (1986), 30 years ago, had a year of public input and the support of both political parties. The 2017 act will likely have more errors and unintended consequences.
The Internal Revenue Service (IRS) has had its budget cut by $900 million (more than 15%) since 2010. There are 21,000 fewer IRS employees than in 2010. Its computer systems are inadequate. After the 1986 reform, the IRS got more employees and budget to handle the tax changes. This time, budget cuts are being proposed. Enforcement has already declined, and it can take months to get IRS errors corrected. We don’t expect better results next year under these conditions. The IRS Inspector General reports increased risk of delays in processing.
On a positive note, life will go on, and we expect an increased demand for tax advice. We believe tax laws will continue to change. We believe an ongoing relationship with our customers is to provide peace of mind about your taxes.
W-2, 1099-MISC, and Partnership
Business owners and rental property owners who pay employees or vendors will now have to file with the IRS by January 31. The Forms W-2 and 1099-MISC previously had to be mailed to employees or vendors by then, but could be sent to the IRS later. Both deadlines are now January 31, to make it easier for the IRS to detect and prevent fraud. Partnership returns are now due one month earlier, on March 15. Late filing penalties have increased, and can be significant, so plan ahead.
Foreign Financial Account Reporting (FBAR and FinCEN)
The filing deadline is April 15, unless you live outside the US. An extension is available for six-months, the same as for individual tax returns.
Arizona Tax Credits
Arizona Qualifying Charitable Organization Tax Credit
The maximum credit has doubled to $400/single and $800/married. The deadline has been extended to April 15, 2019 or when you file your income taxes, whichever comes first. Your 2018 donations made after August 27, 2018 no longer qualify as itemized deductions.
Arizona Foster Care Charitable Organization Tax Credit
The maximum credit has increased to $500/single and $1,000/married. The deadline has been extended to April 15, 2019 or when you file your income taxes, whichever comes first. Your 2018 donations made after August 27, 2018 no longer qualify as itemized deductions.
Arizona Fees Paid to Public Schools (including Charter Schools) Tax Credit
Anyone can take this credit. The maximum credit is $200/single and $400/married. The deadline is April 15, 2019 or when you file your income taxes, whichever comes first. Donations made after August 27, 2018 no longer qualify as itemized deductions.
Arizona School Tuition Organization Tax Credit
Anyone can take this credit. The maximum credit is $1,107/single and $2,213/married. The deadline is April 15, 2019 or when you file your income taxes, whichever comes first. This is actually two credits, and the Organizations will guide you on the details. Donations made after August 27, 2018 no longer qualify as itemized deductions.
Arizona Military Family Relief Fund Tax Credit
Anyone can take this credit, and donations are now being accepted. The maximum credit is $200/single and $400/married. The deadline is as soon as $1,000,000 has been donated and the 2018 limit has been reached. More information is available from the Arizona Department of Veterans’ Services. If you’re interested, check back with them in early 2019.