2018 Tax Changes
Now that the Tax Cuts and Jobs Act has finally become law, there will be quite a few changes for taxpayers for 2018. Of course, the most important thing to most taxpayers since these changes occurred so close to the end of 2017 is to figure out what to do before the changes take affect in 2018.
Here is some information on the changes to help you decide what actions you might want to take before January 1, 2018. The main things that will affect taxpayers in 2018 are 1) the lowering of the tax rates, 2) increasing the standard deduction and 3) changes to some itemized deductions.
The lowering of the tax rates means you will pay slightly less income tax on the same amount of income starting in 2018. That means in most cases deferring income until 2018 will result in less tax being paid on it. The rates are about three percent lower on average.
Of course, if deferring income will put you in a higher tax bracket in 2018, you may not want to defer that income. As always, your own details will matter, so don’t hesitate to contact us about your particular situation.
The Standard Deduction has been almost doubled for 2018. For a single person it is up to $12,000 from $6350 in 2017 with each amount doubled for married couples filing jointly, $24,000 and $12,700 respectively. This means that many people who used to be able to claim Itemized Deductions will now simply claim the Standard Deduction because it will be more.
However, this is not actually doubling the deduction for most taxpayers because the Personal Exemption has also been eliminated. For 2017 a single person will have a Standard Deduction of $6350 plus a personal exemption of $4050 for a total of $10,400 in deductions but will have only a Standard Deduction of $12,000 in 2018.
While the difference in the total deduction is only $1600, the fact that it will all be on the Standard Deduction for 2018 means that many more people will take that deduction instead of Itemizing Deductions. This by itself may be reason enough to accelerate Itemized Deductions into 2017.
Itemized Deduction Changes
Some Itemized Deductions have been reduced and a few even eliminated. Since they will be eliminated or reduced starting in 2018, you should consider paying them in 2017 as much as possible.
*Note: If you are subject to the AMT (Alternative Minimum Tax), you should not automatically try to accelerate your Itemized Deductions into 2017. Please contact your tax advisor to review your specific situation.
There is now a cap of $10,000 for what are called SALT deductions or State and Local Tax deductions. This is a total of the state and local income or sales tax deductions along with state and local property tax deductions.
Since Arizona is not a particularly high tax state in these areas, most of you will probably not hit this cap unless your income is quite high or you have multiple or high value properties. However, if you claim Itemized Deductions now and may not after 2017 because of the increased Standard Deduction, or you live in a higher tax state, you should consider prepaying these taxes in 2017 if it is feasible.
These are two things to keep in mind here. First, paying extra income taxes to get a greater deduction in 2017 will not help you that much unless you will actually owe state income tax for this year. This is because if you overpay your state income tax and claim a deduction for it you will have to report any refund as taxable income in 2018 when you receive the refund.
The other thing is that property taxes are only deductible if they are both assessed and paid in 2017. Since real property taxes in Arizona are assessed in the middle of the year and bills are normally sent out September 1st , payable in two halves, normally due around October 1st of the current year and March 1st of the following year, you would effectively only be able to pay a half of the property tax due early by paying it before the end of 2017.
For example, your real property tax for 2017 of $2000 is assessed on approximately July 1, 2017 with the first half of $1000 due on October 1, 2017 and second $1000 not due until April 1, 2018. You could prepay the $1000 that is due April 1, 2018 by December 31, 2017 and deduct it but you could not prepay any 2018 real property tax because it has not yet been assessed.
*Note: If your property taxes are paid through your mortgage you will need to contact your mortgage company to find out how or even if you can prepay your real estate taxes.
There has not actually been a change to the deduction of charitable donations but you may want to consider moving some planned donations from 2018 into 2017 if you may be claiming the increased Standard Deduction starting in 2018. This is because in order to claim a deduction for any charitable donations, you will need to itemize your deductions and not claim the Standard Deduction.
If you will be claiming Itemized Deductions for 2017, you can actually get more bang for your buck if your donations qualify for one of the many tax credits available from the state of Arizona and are made before the end of the 2017 tax year. These donations will be a deduction on your federal return and also qualify for a credit on your Arizona tax return.
Information on these tax credits and what donations qualify for them can be found here at the official Arizona Department of Revenue website but another website, http://azcredits.org/ also has very useful information and may be easier to understand.
Miscellaneous Itemized Deductions
The Itemized Deductions known as Miscellaneous Itemized Deductions are the ones that are disappearing after 2017. These are the deductions related to the generation or preservation of income and are generally associated with work or investment expenses. They include tax preparation and advice fees, unreimbursed employee business expenses, job hunting expenses and investment advice fees.
The total of these expenses must exceed 2 percent of your adjusted gross income and only the excess of that amount is deductible. Therefore paying these amounts before the end of 2017 only makes sense if you normally exceed this threshold and claim Itemized Deductions on your tax return or are at least sure that you will for 2017.
You may not be able to accelerate all these deductions by prepaying them but items you may be able to include renewing professional memberships and prepaying tax return and investment advisory fees if applicable.
In general, increasing deductions in 2017 and deferring income into 2018 will make the most sense for the majority of taxpayers to consider. However, if you have any questions about your specific tax situation, please contact us to go over it.
If you would like to prepay your 2017 tax preparation fee to us, you can do so on our website using PayPal or you can mail in a check. You can contact us for an estimated amount or use last year’s fee as an estimate. If you use PayPal, please also send us an email to verify the details of your payment.
If you would like to know more information on the basic tax law changes, we suggest you go to the following website: https://www.factcheck.org/2017/12/guide-tax-changes/.