Although the Tax Cuts and Jobs Act of 2017, the Trump administration’s major tax overhaul, was enacted more than a year ago, most of its implications have not trickled down to the average tax payer. With the April tax filing season approaching, that is about to change.
There’s a good chance that the law will have an impact on your tax return, so an overview of the changes is in order. Here are the highlights:
–You can no longer use Form 1040A and 1040-EZ. Form 1040 has been redesigned and supplemented by six new schedules. Instructions/references for these schedules are contained in the instructions for Form 1040.
–The standard deduction has essentially doubled. It is $12,000 for individuals; $24,000 for married persons filing jointly and qualified widows/widowers; and $18,000 for heads of households. The aged and the blind qualify for higher deductions. The implication for many families is that it will pay to use the standard deduction rather than itemize. Another factor is that many items related to itemized deduction have either been reduced or eliminated.
Another implication of the higher standard deductible is that people 70 1/2 and older who are required to make required minimum distributions (RMDs) from their retirement plans should make any charitable contributions in 2019 by asking their trustee to make direct contributions from the retirement plan to the charity. For those who use the standard deduction in 2019, this will impart a tax benefit equivalent to the amount of the charitable donation (up to $100,000) times their marginal tax rate. There is no downside to this strategy even if you do decide to itemize in 2019.
–You can no longer claim a personal exemption for yourself, your spouse or your dependents.
–The child tax credit has been increased. The credit is up to $2,000 per qualified child under age 17. The income limits have been notched up, so you may find that you are eligible for this credit even if you haven’t been in prior years. You may be eligible for a new $500 nonrefundable credit for each eligible dependent for whom the child tax credit cannot be claimed. You can determine the possible credit by filling out the Child Tax Credit and Credit for Other Dependents Worksheet. The worksheet is referenced in Form 1040 instructions.
–There is now a cap of $10,000 on itemized deductions for state and local taxes.
–Roth conversions are permanent. Prior to 2018, you had the option to convert from a traditional IRA to a Roth, and undo the conversion. As of 2018, and likely for subsequent years, the conversion is permanent. Accordingly, when you do consider a Roth conversion — and it makes sense in many situations — understand that you will no longer be able to change your mind.
–The mortgage interest deduction for a principal residence and second residence is limited to acquisition debt of up to $750,000 (for married couple filing jointly; $375,000 for married couple filing separately) for loans acquired after December 15, 2017. No deduction is allowed for home equity debt.
–Cash charitable contributions are limited to 60 percent of adjusted gross income (compared to 50 percent in 2017).
–Other tax breaks are no longer allowed: moving expense deduction (except for certain military personnel); miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor.
Other changes to consider: If you haven’t made the maximum contribution to your 2018 IRA and/or health saving account, you have until April 15, 2019 to make additional contributions. Take into consideration allowable spousal contributions and additional contributions you can make to your retirement accounts if you are 50 or older.
Estimate the amount of your refund or tax liability for 2018. If you find that your refund is lower or tax liability is higher than your expectations, consider reviewing your long-term retirement plan. There are some unfavorable tax changes in 2018 that can affect your long-term planning. You may also want to review your automatic payments for subscriptions and/or renewals in 2019, which would provide some reduction in expenses for 2019.
Review existing contributions to your retirement plans for 2019, especially if your income is higher. If you can afford to increase your contributions in order to lower your tax liability in 2019, and increase savings, consider doing so.
If you are over 70 1/2 and expect to have earned income in 2019, consider contributing to a Roth IRA account, because after 70 1/2, you can no longer contribute to a traditional IRA.
(Article written by Elliot Raphaelson)