It’s almost time to start thinking about filing your 2018 tax return. Those W-2, 1099 and K-1’s will start showing up in your mailbox shortly. 2018 will be the first tax year impacted by the passing of the 2017 Tax Cuts and Jobs Act. This law is the most significant change in tax law since 1986 and was intended to lower tax rates and simplify the process of filing your return. Although the TCJA was advertised as making your tax return fit on a post card, the reality doesn’t live up to the hype.
Here are some of the major changes for individual filers.
The top marginal tax rate is reduced from 39.6% to 37%
The Child Tax Credit doubled from $1,000 to $2,000
Higher thresholds for triggering the Alternate Minimum Tax (AMT) means fewer taxpayers will pay AMT
Parents with 529 Plans can now use the proceeds to help pay for K-12 education
Since the top corporate rate was reduced from 35% to 21%, the new tax law allows a 20% deduction for certain pass through entities like partnerships, S Corporations and LLCs. A limitation on the deduction is phased in based on W-2 wages above a threshold amount of taxable income. The deduction is disallowed for specified service trades or businesses with income above a threshold. The rules around this 20% deduction are quite complex, so consult your tax professional for guidance.
The TCJA doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples, but this impacts very few people.
Now for some potentially bad news for certain taxpayers.
The standard deduction for a married couple has been increased to 24,000, but personal exemptions have been eliminated. As a result, some families with many children will pay higher taxes despite the Act's increased standard deductions.
This higher standard deduction also means that fewer filers will benefit from itemizing their deductions.The primary culprit is a $10,000 cap on the state and local tax deduction. If you have a high income and high property taxes, this is bad news for you.
If you have a home equity line of credit that you used for something other than an improvement to your home, that interest is no longer tax deductible.
The deduction for moving expenses has been eliminated, unless you are in the military.
All miscellaneous itemized deductions subject to the 2% floor under current law are repealed through 2025 by the act.
There are other provisions in the Tax Cuts and Jobs Act that will apply to tax years after 12/31/2018. I’ll post an update on those later.
While I have you thinking about your taxes, it’s a good time to point out some common tax scams.There has been an explosion of fraudulent tax returns filed over the past 5 years. Although the IRS has taken steps to prevent fraud and the numbers are coming down, it pays to be vigilant. Here are the “Dirty Dozen” according to the IRS.
Phishing: Taxpayers should be alert to potential fake emails or websites looking to steal personal information. The IRS will never initiate contact with taxpayers via email about a bill or tax refund. Don’t click on one claiming to be from the IRS. Be wary of emails and websites that may be nothing more than scams to steal personal information. ()
Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as con artists threaten taxpayers with police arrest, deportation and license revocation, among other things. ()
Identity Theft: Taxpayers should be alert to tactics aimed at stealing their identities, not just during the tax filing season, but all year long. The IRS, working in the Security Summit partnership with the states and the tax industry, has made major improvements in detecting tax return related identity theft during the last two years. But the agency reminds taxpayers that they can help in preventing this crime. The IRS continues to aggressively pursue criminals that file fraudulent tax returns using someone else’s Social Security number. ()
Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest, high-quality service. There are some dishonest preparers who operate each filing season to scam clients, perpetuating refund fraud, identity theft and other scams that hurt taxpayers. ()
Fake Charities: Groups masquerading as charitable organizations solicit donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. ()
Inflated Refund Claims: Taxpayers should take note of anyone promising inflated tax refunds. Those preparers who ask clients to sign a blank return, promise a big refund before looking at taxpayer records or charge fees based on a percentage of the refund are probably up to no good. To find victims, fraudsters may use flyers, phony storefronts or word of mouth via community groups where trust is high. ()
Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is usually limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims often involve failures to participate in or substantiate qualified research activities or satisfy the requirements related to qualified research expenses. ()
Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation to falsely inflate deductions or expenses on their tax returns to pay less than what they owe or potentially receive larger refunds. Think twice before overstating deductions, such as charitable contributions and business expenses, or improperly claiming credits, such as the Earned Income Tax Credit or Child Tax Credit. ()
Falsifying Income to Claim Credits: Con artists may convince unsuspecting taxpayers to invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers should file the most accurate tax return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing large bills to pay back taxes, interest and penalties. ()
Frivolous Tax Arguments: Frivolous tax arguments may be used to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims about the legality of paying taxes despite being repeatedly thrown out in court. The penalty for filing a frivolous tax return is $5,000. ()
Abusive Tax Shelters: Abusive tax structures are sometimes used to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. ()
Offshore Tax Avoidance: Successful enforcement actions against offshore cheating show it’s a bad bet to hide money and income offshore. People involved in offshore tax avoidance are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. ()