Important Tax Changes
With the New Year in full swing it's always a sure bet that there will be
changes to current tax law and 2018 is no different now that many of the tax
provisions pursuant to the Tax Cuts and Jobs Act of 2017 (TCJA) are in full
From health savings accounts to tax rate schedules and standard
deductions, here's a checklist of tax changes to help you plan the year
In 2018, a number of tax provisions are affected by inflation adjustments,
including Health Savings Accounts, retirement contribution limits, and the
foreign earned income exclusion. Many others have been revised or eliminated
due to the TCJA.
While the tax rate structure, which now ranges from 10 to 37 percent,
remains similar to 2017 in that there are seven tax brackets, the
tax-bracket thresholds increase significantly for each filing status.
Standard deductions also rise significantly; however, personal exemptions
have been eliminated through tax year 2025.
In 2018, the standard deduction increases to $12,000 for individuals (up
from $6,350 in 2017) and to $24,000 for married couples (up from $12,700 in
Alternative Minimum Tax (AMT)
In 2018, AMT exemption amounts increase to $$70,300 for individuals (up from
$54,300 in 2017) and $109,400 for married couples filing jointly (up from
$84,500 in 2017).
For taxable years beginning in 2018, the amount that can be used to reduce
the net unearned income reported on the child's return that is subject to
the "kiddie tax," is $1,050 (same as 2017). The same $1,050 amount is used
to determine whether a parent may elect to include a child's gross income in
the parent's gross income and to calculate the "kiddie tax." For example,
one of the requirements for the parental election is that a child's gross
income for 2018 must be more than $1,050 but less than $10,500.
For 2018, the net unearned income for a child under the age of 19 (or a
full-time student under the age of 24) that is not subject to "kiddie tax"
Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or
future medical expenses of the account owner, his or her spouse, and any
qualified dependent. Medical expenses must not be reimbursable by insurance
or other sources and do not qualify for the medical expense deduction on a
federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP)
and not be covered by other health insurance with the exception of insurance
for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2018, a qualifying HDHP must have a deductible of at least
$1,350 for self-only coverage or $2,700 for family coverage and must limit
annual out-of-pocket expenses of the beneficiary to $6,650 for self-only
coverage and $13,300 for family coverage.
Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): the Archer MSA
created to help self-employed individuals and employees of certain small
employers, and the Medicare Advantage MSA, which is also an Archer MSA, and
is designated by Medicare to be used solely to pay the qualified medical
expenses of the account holder. To be eligible for a Medicare Advantage MSA,
you must be enrolled in Medicare. Both MSAs require that you are enrolled in
a high-deductible health plan (HDHP).
Self-only coverage. For taxable years beginning in 2018, the term
"high deductible health plan" means, for self-only coverage, a health plan
that has an annual deductible that is not less than $2,300 (up $50 from
2017) and not more than $3,450 (up $100 from 2017), and under which the
annual out-of-pocket expenses required to be paid (other than for premiums)
for covered benefits do not exceed $4,600 (up $100 from 2017).
Family coverage. For taxable years beginning in 2018, the term "high
deductible health plan" means, for family coverage, a health plan that has
an annual deductible that is not less than $4,600 and not more than $6,850
(up $100 from 2017), and under which the annual out-of-pocket expenses
required to be paid (other than for premiums) for covered benefits do not
exceed $8,400 (up $150 from 2017).
Penalty for not Maintaining Minimum Essential Health Coverage
Under the TCJA, the penalty for not maintaining minimum essential health
coverage has been eliminated but only for months beginning after December
AGI Limit for Deductible Medical Expenses
In 2018, the deduction threshold for deductible medical expenses is
temporarily reduced (tax years 2018 through 2025) to 7.5% percent (down from
10% in 2017) of adjusted gross income (AGI).
Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and
are deductible on your taxes subject to certain limitations. For individuals
age 40 or younger at the end of 2018, the limitation is $420. Persons more
than 40 but not more than 50 can deduct $780. Those more than 50 but not
more than 60 can deduct $1,530 while individuals more than 60 but not more
than 70 can deduct $4,160. The maximum deduction is $5,200 and applies to
anyone more than 70 years of age.
The additional 0.9 percent Medicare tax on wages above $200,000 for
individuals ($250,000 married filing jointly), which went into effect in
2013, remains in effect for 2018, as does the Medicare tax of 3.8 percent on
investment (unearned) income for single taxpayers with modified adjusted
gross income (AGI) more than $200,000 ($250,000 joint filers). Investment
income includes dividends, interest, rents, royalties, gains from the
disposition of property, and certain passive activity income. Estates,
trusts, and self-employed individuals are all liable for the new tax.
Foreign Earned Income Exclusion
For 2018, the foreign earned income exclusion amount is $104,100, up from
$102,100 in 2017.
Long-Term Capital Gains and Dividends
In 2018 tax rates on capital gains and dividends remain the same as 2017
rates (10%, 15%, and a top rate of 20%); however threshold amounts are
different in that they don’t correspond to new tax bracket structure as they
did in the past. For taxpayers in the lower tax brackets (10 and 12
percent), the rate remains 0 percent; however, the threshold amounts are
$38,600 for individuals and $77,200 for married filing jointly. For
taxpayers in the four middle tax brackets, 22, 24, 32, and 35 percent, the
rate is 15 percent. For an individual taxpayer in the highest tax bracket,
37 percent, whose income is at or above $425,800 ($479,000 married filing
jointly), the rate for both capital gains and dividends is capped at 20
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption
phase-out) have been eliminated under TCJA.
Estate and Gift Taxes
For an estate of any decedent during calendar year 2018, the basic exclusion
amount is $11,200,000, indexed for inflation (up from $5,490,000 in 2017).
The maximum tax rate remains at 40 percent. The annual exclusion for gifts
increases to $15,000.
Individuals - Tax Credits
In 2018, a non-refundable (only those individuals with tax liability will
benefit) credit of up to $13,840 is available for qualified adoption
expenses for each eligible child.
Earned Income Tax Credit
For tax year 2018, the maximum earned income tax credit (EITC) for low and
moderate income workers and working families rises to $6,444, up from $6,318
in 2017. The credit varies by family size, filing status, and other factors,
with the maximum credit going to joint filers with three or more qualifying
Child Tax Credits
For tax years 2018 through 2025, the child tax credit increases to $2,000
per child, up from $1,000 in 2017, thanks to the passage of the TCJA.
The enhanced child tax credit, which was made permanent by the Protecting
Americans from Tax Hikes Act of 2017 (PATH), remains under TCJA. The
refundable portion of the credit increases from $1,000 to $1,400 so that
even if taxpayers do not owe any tax, they can still claim the credit. Under
TCJA, a $500 nonrefundable credit is also available for dependents who do
not qualify for the child tax credit (e.g., dependents age 17 and older).
Child and Dependent Care Credit
The Child and Dependent Care Credit also remains under tax reform. If you
pay someone to take care of your dependent (defined as being under the age
of 13 at the end of the tax year or incapable of self-care) in order to work
or look for work, you may qualify for a credit of up to $1,050 or 35 percent
of $3,000 of eligible expenses in 2018. For two or more qualifying
dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible
expenses. For higher income earners the credit percentage is reduced, but
not below 20 percent, regardless of the amount of adjusted gross income.
Individuals - Education
American Opportunity Tax Credit and Lifetime Learning Credits
The American Opportunity Tax Credit (formerly Hope Scholarship Credit) was
extended to the end of 2018 by ATRA but was made permanent by PATH in 2017.
There was no change under TCJA. The maximum credit is $2,500 per student.
The Lifetime Learning Credit remains at $2,000 per return; however, the
adjusted gross income amount used by joint filers to determine the reduction
in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year
Interest on Educational Loans
In 2018 (as in 2017), the $2,500 maximum deduction for interest paid on
student loans is no longer limited to interest paid during the first 60
months of repayment. The deduction is phased out for higher-income taxpayers
with modified AGI of more than $65,000 ($135,000 joint filers).
Individuals - Retirement
The elective deferral (contribution) limit for employees who participate in
401(k), 403(b), most 457 plans, and the federal government's Thrift Savings
Plan increases to $18,500. Contribution limits for SIMPLE plans remain at
$12,500. The maximum compensation used to determine contributions increases
to $275,000 (up from $270,000 in 2018).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is
phased out for singles and heads of household who are covered by an
employer-sponsored retirement plan and have modified AGI between $63,000 and
$73,000, up from $62,000 to $72,000.
For married couples filing jointly, in which the spouse who makes the IRA
contribution is covered by an employer-sponsored retirement plan, the
phase-out range increases to $101,000 to $121,000, up from $99,000 to
$119,000. For an IRA contributor who is not covered by an employer-sponsored
retirement plan and is married to someone who is covered, the deduction is
phased out if the couple's modified AGI is between $189,000 and $199,000, up
from $186,000 and $196,000.
The modified AGI phase-out range for taxpayers making contributions to a
Roth IRA is $120,000 to $135,000 for singles and heads of household, up from
$118,000 to $133,000. For married couples filing jointly, the income
phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The
phase-out range for a married individual filing a separate return who makes
contributions to a Roth IRA is not subject to an annual cost-of-living
adjustment and remains $0 to $10,000.
In 2018, the AGI limit for the saver's credit (also known as the retirement
savings contribution credit) for low and moderate income workers is $63,000
for married couples filing jointly, up from $62,000 in 2017; $47,250 for
heads of household, up from $46,500; and $31,500 for married individuals
filing separately and for singles, up from $31,000 in 2017.
Standard Mileage Rates
In 2018, the rate for business miles driven is 54.5 cents per mile, up from
53.5 cents per mile in 2017.
Section 179 Expensing
Under the Tax Cuts and Jobs Act of 2017, the Section 179 expense deduction
increases to a maximum deduction of $1 million of the first $2,500,000
million of qualifying equipment placed in service during the current tax
year. Indexed to inflation after 2018, the deduction was enhanced to include
improvements to nonresidential qualified real property such as roofs, fire
protection and alarm systems and security systems, and heating, ventilation,
and air-conditioning systems.
Businesses are allowed to immediately deduct 100% of the cost of eligible
property in the year it is placed in service after which it will be phased
downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and
20% in 2026.
Work Opportunity Tax Credit (WOTC)
Extended through 2019, the Work Opportunity Tax Credit has been modified and
enhanced for employers who hire long-term unemployed individuals (unemployed
for 27 weeks or more) and is generally equal to 40 percent of the first
$6,000 of wages paid to a new hire. There was no change to this tax credit
Research & Development Tax Credit
Starting in 2018, businesses with less than $50 million in gross receipts
are able to use this credit to offset alternative minimum tax. Certain
start-up businesses that might not have any income tax liability will be
able to offset payroll taxes with the credit as well. There was no change to
this tax credit under TCJA.
Employee Health Insurance Expenses
For taxable years beginning in 2018, the dollar amount is $26,700 ($26,200
in 2017). This amount is used for limiting the small employer health
insurance credit and for determining who is an eligible small employer for
purposes of the credit.
Employer-provided Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, in 2018 the
maximum monthly limitation for transportation in a commuter highway vehicle
as well as any transit pass is $260, and the monthly limitation for
qualified parking is $260. Parity for employer-provided mass transit and
parking benefits was made permanent by PATH.
While this checklist outlines important tax changes for 2018, additional
changes in tax law are more than likely to arise during the year ahead.
Don't hesitate to call if you want to get an early start on tax planning for
2018! Help is just a phone call away at
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