IRS Tax Changes for 2018

The IRS has released its 2018 tax updates via Notice 2017-64 and revenue procedure 2017-58. Highlights are provided below. Remember these updates are for 2018 taxes filed in 2019. For the upcoming 2017-18 tax year, I have included links (for filings due next year by April 17, 2018) where applicable.

Personal Tax Brackets

• The standard deduction for married filing jointly rises to $13,000 for tax year 2018, up $300 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,500 in 2018, up from $6,350 in 2017, and for heads of households, the standard deduction will be $9,550 for tax year 2018, up from $9,350 for tax year 2017.
• The personal exemption for tax year 2018 rises to $4,150, an increase of $100. The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly.)
• For tax year 2018, the 39.6 percent tax rate affects single taxpayers whose income exceeds $426,700 ($480,050 for married taxpayers filing jointly), up from $418,400 and $470,700, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – also saw increases in their taxable income brackets.
• The limitation for itemized deductions to be claimed on tax year 2018 returns of individuals begins with incomes of $266,700 or more ($320,000 for married couples filing jointly).
• The Alternative Minimum Tax (AMT) exemption amount for tax year 2018 is $55,400 and begins to phase out at $123,100 ($86,200, for married couples filing jointly for whom the exemption begins to phase out at $164,100). For tax year 2018, the AMT 28 percent tax rate applies to taxpayers with taxable incomes above $191,500 ($95,750 for married individuals filing separately).
• The tax year 2018 maximum Earned Income Tax Credit (EITC) amount is $6,444 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,318 for tax year 2017.
• For calendar year 2018, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage (under Obamacare) remains as it was for 2017:  $695.
• For tax year 2018, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,300, an increase of $50 from tax year 2017; but not more than $3,450, an increase of $100 from tax year 2017. For self-only coverage, the maximum out-of-pocket expense amount is $4,600, up $100 from 2017. For tax year 2018, participants with family coverage, the floor for the annual deductible is $4,600, up from $4,500 in 2017; however, the deductible cannot be more than $6,850, up $100 from the limit for tax year 2017. For family coverage, the out-of-pocket expense limit is $8,400 for tax year 2018, an increase of $150 from tax year 2017.
• For tax year 2018, 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 2017.
• For tax year 2018, the foreign earned income exclusion is $104,100, up from $102,100 for tax year 2017.
• The annual exclusion for gifts increased to $15,000, an increase of $1,000 from the exclusion for tax year 2017.

Retirement plans (401K, 403(b), 457 plans etc)

• The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased by $500 from $18,000 to $18,500. See this article for more details and year over year changes.
• The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan remains unchanged at $6,000.
• The limitation for defined contribution plans is increased from $54,000 to $55,000.
• The annual compensation limit is increased from $270,000 to $275,000.

Traditional IRA phase-out income ranges for 2018 were also increased (see 2017 levels), which allows more tax payers to claim IRA deductions if they earn below these levels:

• For single taxpayers covered by a workplace retirement plan, the phase-out range is $63,000 to $73,000, up from $62,000 to $72,000.
• For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $101,000 to $121,000, up from $99,000 to $119,000.
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $189,000 and $199,000, up from $186,000 and $196,000.
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The 2018 income 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.

The limit on tax deductible annual contributions to an IRA remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.

The compensation amount regarding simplified employee pensions (SEPs) remains unchanged at $600, while the limitation regarding SIMPLE retirement accounts remains unchanged at $12,500.

The dollar limitation concerning the definition of key employee in a top-heavy plan remains unchanged at $175,000. while the limitation used in the definition of highly compensated employee remains unchanged at $120,000

All the above date is based on current IRS guidelines and does not factor in any potential Trump related tax reforms.

Source: IRS.gov