Understanding Personal Deductions For Your 2018 Tax Return

It’s everyone’s favorite time of year - tax filing season! The Tax Cuts and Jobs Act made many significant changes to the tax code, and 2018 is the first filing year under the new tax rules.

Decoding Tax Terminology

Before we jump into the changes, it’s important to understand a few core tax terms:

• Adjusted gross income: It seems self explanatory but this is your gross or total income minus any adjustments, which are also called “above the line deductions,” such as contributions to tax-deductible accounts like your 401(k) or IRA, and is the basis for how much of your income is taxable.
• Tax Deduction: An amount that the IRS allows you to subtract from your adjusted gross income, which lowers your taxable income. There are two ways to claim tax deductions: itemized and standard. The standard deduction is a flat amount that depends on your filing status. Itemized deductions take more time and require proof that you are entitled to that deduction, but may save you more money than the standard deduction, depending on your personal situation.
• Tax Credit: While a deduction lowers taxable income, a credit, such as a child tax credit, lowers your tax bill itself, dollar for dollar. Depending on the credit, it may also be refundable, meaning if the credit amount exceeds the amount you owe to Uncle Sam, you get money back.
  

How Tax Deductions Change in 2018

Because many of the Tax Cuts and Jobs Act changes begin to take effect in your 2018 tax filing, don’t assume that what you’ve done in the past is still what is best. The standard deduction, for example, increased in 2018, meaning that those who usually itemize might be better off taking the standard deduction.

How much did the standard deduction change? For single filers, the deduction increased from $6,350 to $12,000. Those over 65 and single or those who are blind are eligible for an additional $1,600 deduction on their 2018 taxes, up from $1,550 last year.

For those who are married and filing jointly, the deduction increased from $12,700 to $24,000. Those who are over 65 and married filing jointly are eligible for an additional $2,600, up from $2,500 last year.

For heads of household, meaning that you pay more than half of the expenses, have a qualifying dependent and are unmarried for the tax year, the standard deduction is now $18,000, up from $9,350 last year.

Because there are so many changes to itemized deductions due to the The Tax Cuts and Jobs Act, below are some variations that may impact your 2018 tax filing strategy:

Personal Exemptions and the Child Tax Credit

The personal exemption, deducted from your taxes, was $4,050 for yourself and $4,050 for each dependent you claim on your tax return, but that is no longer the case. While the higher new standard deduction could result in a larger overall deduction when compared with the combined standard deduction and personal exemption you took in 2017, that may not be the case if you have a family and enjoyed a large personal exemption in the past.

There were also changes to the Child Tax Credit. The credit was $1,000 per child under 17, based on their age at the end of the year you claim the credit. It was refundable, meaning that if the credit was larger than what you owed, you would receive money for the difference, if you earned at least $3,000. It also decreased if your adjusted gross income was above $75,000 or $110,000, if you are a joint filer. The credit is now $2,000 per child, but the refundable portion is capped at $1,400. The phase out for the credit starts at $200,000 or $400,000 for those who file jointly.

While the dependent exemption is gone under the new tax law, the definition of dependent remains for claiming the Child Tax Credit. The child must be related to the person making the claim, they must live in that person’s home for more than half the year, and the child cannot provide more than half of their support.

Home Mortgage Interest

Previously, you could deduct up to $1 million in interest paid on mortgage debt, as well as the interest paid on home equity loans or lines of credit (HELOC) up to $100,000. In your 2018 filing, you can write off the interest up to $750,000 on qualified residence loans, or those loans to buy, build or improve your home. It’s important to note that the IRS only allows you to take a deduction for HELOCs only if the money was used to improve your home.

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State and Local Tax Deduction

Under old tax laws, there was an itemized deduction for state and local taxes, which meant you could deduct what you paid in property, income and sales taxes. Massachusetts Taxpayers Foundation research found that Massachusetts filers took an average $17,000 state and income tax deduction. In 2018, however, those deductions are capped at $10,000.

It’s best to talk to your accountant or a tax professional about the best strategy for your specific financial situation. However, these tax law changes might also impact your plans and financial goals. Our bankers are happy to work with you at any time to adjust your financial game plan to make sure you can reach whatever milestones are most important to you.

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