In December 2017, Congress passed the Tax Cuts and Jobs Act, which contained significant changes to the tax code.
Last year, the withholding tables were adjusted so that taxpayers’ take-home pay would increase in anticipation of the reduced taxes. My experience so far this year is that this plan has backfired for many taxpayers. They are finding that their refunds are either lower than they were expecting or they owe taxes for 2018.
For those who still benefit from itemizing, there is now a $10,000 limit on the deduction for state and local taxes.
Here in Arizona, as of this writing, we are waiting for the Legislature to decide whether it will conform to the federal changes or make adjustments for Arizona purposes. Without any action, many Arizona taxpayers will likely see their 2018 income tax liability.
One way to minimize the impact of the state tax liability is to contribute to one of the state’s qualified tax credit organizations. You have until April 15, 2019 to make payments to various nonprofit organizations that qualify for a dollar-for-dollar credit against your Arizona tax liability. You can find the types of tax credits, as well as lists of qualifying organizations and applicable amounts, by going to azdor.gov/tax-credits
Here are just a few of the other major changes in the tax code that will impact individual taxpayers for 2018.
Marginal tax rates were lowered for most taxpayers. The top rate is now 37 percent instead of 39.6 percent.
Although the personal exemption ($4,050 per person) was eliminated, it was replaced with the increased standard deduction and the child tax credit. The standard deduction almost doubled, increasing from $6,500 to $12,000 for individual filers, and from $13,000 to $24,000 for married filing joint filers. Many taxpayers who previously itemized may now benefit from the higher standard deduction.
Miscellaneous itemized deductions have been eliminated. Medical expenses are still deductible to the extent they exceed 7.5 percent (10 percent for 2019) of Adjusted Gross Income (AGI).
The expanded child tax credit doubled from $1,000 to $2,000 per child for taxpayers with qualifying children under 17. This credit is partially refundable up to $1,400, but phases out with modified AGI levels in excess of $200,000 ($400,000 for married filing
Allowable mortgage interest is now limited to interest on qualifying mortgages of $750,000’ lowered from $1 million, and interest on home equity debt is eliminated except if you use the proceeds to improve your home. If you already had a mortgage in place by December 15, 2017 that exceeds the new limits, you will still be allowed to deduct the interest up to the previous limits ($1 million), but if you refinance your home, you will be limited to the new thresholds.
The rules surrounding the “kiddie tax” also changed. Children (under 18 or between 19-23 and a full-time student) with unearned income in excess of $2,100 used to be taxed at their parents’ marginal tax rates. Starting in 2018, the income will be taxed at the trust and estate levels, which jump to higher marginal rates at much lower amounts. They hit the maximum tax rate of 37 percent with as little as $12,500 of taxable income. Compare that to the rates that don’t hit 37 percent until over $500,000 of income.
In past years, many taxpayers were caught with owing Alternative Minimum tax (AMT). This is a separate calculation that eliminated various preference items (for example, state and local taxes) and recalculates the tax liability with a different tax rate. You owe whichever is higher (regular tax or AMT). While the AMT was not eliminated, the exemption amounts were increased and the level at which those exemptions were phased out was increased significantly. It’s almost certain that significantly fewer taxpayers will be subject to the AMT.
Each taxpayer is unique. There are differing types of income and deductions that will impact your tax liability. Preparing your taxes early so that you can plan for any unexpected consequences is advisable. Taxes are due April 15, 2019 even if you file for an extension. Please contact your tax adviser for specific answers to your situation. JN
Victoria C. Harris, CPA, is the managing partner at the Scottsdale-based public accounting firm Hunter Hagan & Company Ltd.