New tax brackets, a larger standard deduction are in, but one of the deductions you may have counted on in the past is gone.
With the IRS, and South Carolina Department of Revenue open for business and ready to process your returns, you need to be aware of some major differences from last year.
We asked Charleston area CPA Christopher Nowell, for a list of some of changes that will impact you. Here is the reality about your 2018 taxes:
Lower Individual Tax Rates — The legislation creates lower individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate from 39.6% to 37%, respectively. (The pre-reform rates in effect before 2018 would be restored in 2026, i.e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively).
Modification of the Alternative Minimum Tax (AMT) – The legislation retains the AMT for individuals but increases the exemption amount and phaseout thresholds so fewer people will pay it. From 2018 through 2025, a higher AMT exemption will apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption will begin to phase out at $1 million for joint filers and $500,000 for other taxpayers. These thresholds will be adjusted for inflation annually.
Increase in the Standard Deduction — For 2018 through 2025, the standard deduction increases significantly from $12,700 in 2017 to $24,000 for joint filers, from $9,350 to $18,000 for heads of households, and from $6,350 to $12,000 for singles. These amounts will be adjusted for inflation annually. Since you can claim the higher of the standard deduction or itemized deductions, you will want to closely compare the two methods as you may now benefit from a higher standard deduction given the many changes to itemized deductions.
Elimination of Personal Exemptions — In exchange for lower tax rates and increase in the standard deduction, personal exemptions no longer may be claimed for tax years 2018 through 2025.
Child and Dependent Credits — For tax years 2018 through 2025, the reform legislation increases the value of the child tax credit to $2,000 per child under 17 from $1,000. As much as $1,400 of the credit will be refundable, thus allowing recipients to benefit even if they don’t owe taxes. You will need to provide your child’s Social Security number to claim the refundable portion through 2025. The refundable portion of the credit will be indexed for inflation. The legislation also expands eligibility for the credit by increasing the phaseout threshold to $400,000 of adjusted gross income for joint filers (up from $110,000 under pre-reform law), with a threshold for all other filers set at $200,000. A $500 nonrefundable credit for dependents other than qualifying children will be available through 2025 (and no Social Security number is required).
$10,000 Cap on State and Local Tax Deduction — In a significant departure from prior law, the legislation will allow individuals to deduct no more than $10,000 of any combination of the following taxes – state and local income taxes, state and local property taxes, and sales taxes – for tax years 2018 through 2025. This overall limitation may result in the enhanced standard deduction yielding a larger deduction against your adjusted gross income and thus a lower tax bill.
Limits on Mortgage Interest Deduction — The tax reform act reduces the amount of mortgage indebtedness on which taxpayers may deduct interest to $750,000 for mortgages incurred after December 15, 2017. (The $1 million limitation remains for older debt). Interest on your principal residence and a second home are deductible. Importantly, however, beginning in 2018, interest on home equity indebtedness no longer is deductible, regardless of when it was incurred. Certain exceptions apply. These rules apply through 2025.
Medical Expense Deduction — All individuals may deduct medical expenses for 2017 and 2018 if the expenses exceed 7.5% of adjusted gross income, regardless of age. However, the AGI threshold returns to 10% of adjusted gross income in 2019 for all taxpayers, regardless of age. Again, you will need to review whether claiming such expenses, when combined with other allowable itemized deductions, yields a higher deduction than the standard deduction.
Charitable Contributions — For tax years 2018 through 2025, the legislation increases the AGI limitation on cash contributions from 50% to 60%, thus effectively allowing for an increased deduction. However, the reform act permanently repeals the 80% deduction for contributions made for university athletic seating rights, effective for contributions made after 2017.
Moving Expense Deduction — The deduction for moving expenses is eliminated for tax years 2018 through 2025 except for individuals who are active duty members of the United States Armed Forces.
Elimination of Miscellaneous Itemized Deductions (including Unreimbursed Employee Business Expenses) — The reform act eliminates the deduction for miscellaneous itemized deductions for tax years 2018 through 2025. Thus, deductions subject to the 2% floor of adjusted gross income for costs related to the production or collection of income such as appraisal fees, investment fees, and safety deposit box rentals are not deductible. Importantly, expenses related to employment, such as uniforms, union dues, professional society dues, cell phone, computer used for work, and job-hunting expenses also are not deductible. Employees who incur significant unreimbursed business expenses may want to ask their employer about adjusting their compensation or establish an accountable expense reimbursement plan that would allow the employer to reimburse the employee tax-free while also entitling the employer to a deduction against their business income.
Alimony Deduction — The tax legislation repeals the above-the-line deduction for alimony paid for divorces or separations executed after December 31, 2018. After that date, alimony payments will not be included in the recipient’s income and the payments no longer will be deductible by the payor. If you are currently contemplating divorce or separation, a careful review of the effects of the new law should be undertaken to determine the economic effects on your tax situation and timing of any agreements.
The SCDOR added a couple of other changes that are specific to your SC state return:
Here are two items that may impact taxpayers when filing their South Carolina return:
· I-385 – Motor Fuel Income Tax Credit
o Form must be included with the resident taxpayer’s income tax return
o New line 22e on SC1040 used to claim credit
o Taxpayers do not need to send receipts with the form (but save receipts for tax records)
· SC Dependent Exemption
- New exemption equaling $4,110 for each eligible dependent
- New subtraction line on SC1040 (line w)