CHICAGO—Already seeing winter holiday decorations in your local stores, even though it is just Halloween? In the same spirit, it is time to start prepping for filing your tax return, which is due by April 15, 2019.
If you are going to make a difference in what you owe, the last two months of 2018 are crucial. But some of the deductions and tax strategies you used in the past might have changed due to the Tax Cuts and Jobs Act that went into effect this year.
Here is a refresher on what you need to know:
1. What Is Gone
Almost all miscellaneous deductions were dropped. For 2018, it will no longer matter if you accumulate moving expenses for a new job, run up expenses that will not be reimbursed from your employer, or get tax preparation advice or a safety deposit box.
Personal exemptions are also gone, while the standard deduction has doubled to $24,000 for couples and $12,000 for individuals.
2. What Has Changed
For people in high-tax states, what may be most crucial is that there is now a $10,000 cap on what you can deduct on your federal tax return for everything from property taxes to state income and sales taxes.
Also, if you bought a home in 2018, only mortgage interest on debt up to $750,000 can be deducted. In the past the limit was $1 million and that still applies to previous purchases.
For home equity loans or lines of credit, you can no longer deduct interest unless you used the money to buy, build, or improve your home. Beware: Even borrowing to pay for college will not be deductible. The new rules apply even if you took out the loan before this year.
Losses from fires and storms are generally no longer deductible, although Mark Luscombe, principal analyst for Wolters Kluwer Tax and Accounting, said to watch for permitted losses from hurricanes through specific designations as “presidential declared disaster areas.”
One good note is that as itemized deductions were slashed, one became better. In the recent past, medical expenses had to exceed 10 percent of your adjusted gross income to count for most people, but that threshold for 2018 is just 7.5 percent for everyone. In 2019, the 10 percent threshold returns.
3. What Has New Impact
Selling stocks, bonds, funds, and real estate that have gained value in taxable accounts can increase your taxable income, so trying to alleviate the impact of capital gains remains a smart strategy.
But this year the cutoffs for capital gains rates are no longer in sync with tax brackets, so pay attention to income cutoffs, said Luscombe. For the zero percent capital gains rate, which allows you to sell an investment you have owned for at least a year (a long-term capital gain) without paying tax: Singles can have incomes up to $38,600 and couples up to $77,200.
Once above that, long-term capital gains rates jump to 15 percent, 20 percent, and 23.8 percent. Yet, investors can reduce—or eliminate—capital gains taxes by selling an investment that has declined in value since it was purchased.
Tim Steffen, director of advanced planning for Baird Private Wealth Management, noted that no investment should be sold for tax reasons alone, but if a person can harness the zero percent rate now and expects higher income in the future, consider selling.
4. What Remains
Teachers who spend $250 in their classrooms can still file an above-the-line deduction, even though most others were wiped out. Also, disabled people traveling to work, and military people going 100 miles or more from home and staying overnight can still claim deductions.
If you pay alimony you can continue deduct the payments from income, and if you receive it you will claim it as income. But for any divorce that happens in 2019 or later this goes away.
By Gail MarksJarvis