Don’t be fooled by the ongoing US government shut-down. Your 2018 US tax returns are still due. For those taxpayers who are US citizens or residents of the United States, your taxes are due April 15, 2019 (unless extended). You can start as early as January 28, 2019 to file either your paper or electronic tax returns. This is the date the IRS will commence accepting 2018 returns despite the current government shut-down.
However, your 2018 tax liability may look different than from prior years because of changes made under the Tax Cuts and Jobs Act (TCJA). Most of the changes apply to taxable years beginning after December 31, 2017 until December 31, 2025. After 2025, these new rules expire and generally the applicable rules revert to the tax rules in place prior to the TCJA legislation. The following highlights just some of the many changes and how it may impact your bottom line.
Standard Deduction and Personal Exemption Changes
In 2018, an individual taxpayer, including those married and filing separate returns may reduce his or her adjusted gross income by the standard deduction of $12,000. For those taxpayers who are married and filing a joint return, the standard deduction increased to $24,000. This is a significant increase compared to 2017 amounts when the basic standard deduction was $6,350 (single individuals and married filing separate returns filers) and $12,700 (married individuals filing a joint return). As a result of the large increase in the standard deduction, it is not surprising that the personal exemption has been eliminated.
Alimony and separate maintenance payments made during 2018 are deductible by the payor spouse and includible in income by the recipient spouse. However, for divorce or separation instruments executed after December 31, 2018 (including modification of a prior instrument) alimony and separate maintenance payments are not deductible by the payor. Furthermore, such payments are not includible in income by the recipient spouse.
In prior years, a deduction was permitted for moving expenses paid in connection with the commencement of work by the taxpayer as an employee or self-employed individual at a new principle place of work (if certain conditions were met). Effective January 1, 2018 to December 31, 2025 the deduction for moving expenses has been suspended. As a result, all moving expenses paid or reimbursed by the employer will be taxable to the employee and subject to tax withholding.
Entertainment Expenses and Meals
Under TCJA, no deduction is allowed for amounts paid with respect to the following:
- Entertainment, amusement or recreation expenses, and
- Membership in any clubs organized for business, pleasure or recreation purposes.
However, taxpayers may continue to deduct 50% of the amount of meals and beverages which incurred in the operation of a trade or business. Specifically, the following meals paid or incurred after December 31, 2017 are 50% deductible:-
- Business meals with current or prospective clients or customers
- Business meals with employees, staff, management
- Employee meals while travelling
- Employee meals provided by the employer for the employer’s convenience.
Only meals at a company holiday party are deductible at a rate of 100%.
Itemized Deduction Changes
Commensurate with increasing the standard deduction, the TCJA has made further changes to disallow many of the itemized deductions that were once claimed on Schedule A, as follows: –
- Medical expense limit – a deduction can be claimed for unreimbursed medical expenses but only to the extent that such expenses exceed 7.5% of adjusted gross income (this change came into effect as of 01/01/2017 and the remains in effect until 12/31/2018).
- State and local tax deduction and limit – a limited deduction of $10,000 for individuals (or $5,000 for married filing separate filers) can be claimed for State, local, sales and property taxes. A deduction for foreign real property taxes is no longer allowed.
- Home mortgage interest deduction – a deduction can be claimed for interest paid on a “qualified residence loans” (i.e., interest paid on a loan secured by your main home or second home that you used to buy, build, or substantially improve your main home or second home) but only on loans not exceeding $750,000 (if filing jointly) or $375,000 (if filing a separate).
- Suspension of ALL miscellaneous deductions including, for example:-
- Unreimbursed employee expenses
- Tax preparation fees
- Tax advisory fees
- Investment advisor fees and expenses
- Certain legal fees
- Safety deposit box rentals