By: Bob Leins, CPA®
Published: July 20, 2018
Congress passed the TCJA December 27, 2017 and the law became effective five days later, January 1, 2018. Now, over six months later, how will the TCJA benefit you? As we enter the second half of 2018, changes within the TCJA have become somewhat easier to identify but remain less clear to apply personally. A central focus of the TCJA changes is structured to decrease personal total income tax. Let’s review some highlights and focus on their application to you:
The bulk of personal income while working is from salary, investment income and possibly Social Security. In retirement, income is generally driven by your Federal Annuity (FERS, CSRS, Law Enforcement, Military, etc.), TSP and IRA distributions and investment income. These sources of income are generally unchanged by the TCJA.
After 2018, two sources of income will no longer be taxable: alimony income and state tax refunds. If you are currently in divorce proceedings – take special note. Non-taxable alimony income begins for divorces executed after 2018 and on the flip side, alimony payments for divorces executed after December 31, 2018 will no longer be deductible. If you are in the process of divorcing, it is recommended that you consult with an attorney and/or tax professional to make sure you clearly understand how this change will affect you.
TAX DEDUCTIBLE ITEMS
Tax deductible items have been enhanced while some have been eliminated. Enhancements can be found in a much larger “standard deduction”. Eliminations include “adjustments” (moving expense and alimony payments mentioned above). All “Miscellaneous” deductions that may have included professional dues, professional publications, tax preparation, investment advice and personal exemptions appear to be eliminated after 2018.
The “Standard Deduction” has been greatly increased. A “Standard Deduction” is a defined fixed amount that benefits those whose itemized deductions are less than the “Standard Deduction”. Be aware that the “Standard Deduction” while high, includes you, as well as your dependent deductions.
Income Tax Rates have been substantially reduced. The tax rate reductions together with less taxable income results in a lower Federal Tax for most, but not all.
AMT has all but been eliminated for most taxpayers. The “Alternative Minimum Tax” is also known as “AMT”.
How will the TCJA impact you? The best way to reasonably project the impact relative to your personal return is to use a “Tax Projector”. Most tax preparation software as well as tax professionals can generate a projection of your 2018 return using your 2017 income and deductions. It should be as easy as clicking the option within your tax software or contacting your tax professional. The projection will provide a solid indication if there will be a refund or balance due for 2018. Best to know that answer now well before December 31, 2018.
Summary, most tax preparation software provides a “projector” that will calculate your 2018 personal income tax using your 2017 tax information.
Be aware that all the TCJA terminate in 2025. At that date, all TCJA changes cease and tax law reverts to the 2017 tax law! However, it’s best to wait and see.
2018 Form 1040
IRS distributed their initial draft of the 2018 Form 1040 on June 29. Please search “2018 IRS Form 1040” and you will be able to see the “postcard” size of the 2018 Form 1040.
While the physical size of IRS Form 1040 has been reduced, the same can’t be said for its complexity. Your 1040 form is 2 pages that may require additional IRS Forms and schedules, far in excess of what is currently required.
Charles R. (Bob) Leins is a frequent presenter to Federal agencies covering tax and financial planning at the beginning, mid-career, and retirement career stages. These seminars are presented to the entire spectrum of the civilian Federal workforce. He is a Certified Public Accountant and founding partner of Gold, Leins & Adoff, Rockville, Maryland. Mr. Leins specializes in taxation and business planning at the individual and small-business levels.