6 | RKL 2018 Year-End Tax Planning Guide RKL 2018 Year-End Tax Planning Guide | 7 2018 STANDARD DEDUCTION FILING STATUS STANDARD DEDUCTION Single/Married Filing Separately $12,000 Married Filing Jointly/Surviving Spouse $24,000 Head of Household $18,000 Under tax reform, the standard deduction nearly doubles and the personal exemption disappears. The standard deduction increase is intended to simplify tax filing and offset another component of the law – the elimination or reduction of many tax credits and deductions, which will be covered later in this guide. Many taxpayers who previously itemized deductions may now fall under the standard deduction threshold. Although there is less to track, it is still a best practice to document itemized deductions. Standard deduction amounts will be adjusted for inflation annually using the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), as explained on page 16 of this guide. The change in the standard deduction also impacts dependent filers. The standard deduction amount for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,050 or the sum of $350 and the individual’s earned income up to $12,000. If a taxpayer is age 65 or older and/or blind on the last day of the tax year, he or she remains entitled to take an additional standard deduction. This additional deduction amount equals $1,300 and increases to $1,600 for unmarried taxpayers. Tax reform changed several popular tax deductions, which are recapped below. The legislation also suspended through December 31, 2025 the so-called Pease Rule which reduced itemized deductions of certain taxpayers by three percent of their adjusted gross income (AGI). As with the new tax rates, all changes made to individual tax credits and deductions are temporary and generally expire after 2025. Above-the-line deductions: • Moving expenses: This deduction is repealed through the end of tax year 2025, but remains available to members of the Armed Forces (or their spouses or dependents) who are active duty, required to move by military order related to a permanent change of station. • Alimony: Tax reform eliminates deductions for alimony payments required under divorce or separation instruments executed after December 31, 2018. Recipients of affected alimony payments will no longer have to include them in taxable income. Tax reform’s treatment of alimony payments also applies to divorce or separation decrees that are modified after December 31, 2018, if the modification specifically states that the new treatment of alimony payments now applies. For individuals who must pay alimony, this change may be expensive. Child support payments remain non-deductible by the payor. Itemized deductions: • Medical expenses: Taxpayers may continue to deduct medical expenses in excess of 7.5 percent of adjusted gross income. For tax year 2018, the AGI threshold was lowered from the previous 10 percent. • State, local and real estate taxes: These deductions are cumulatively capped at $10,000 for married filing jointly and $5,000 for single filers. Keep in mind an individual cannot deduct foreign real estate property taxes unless the property is used in a trade or business. • Mortgage interest: The cutoff for mortgage interest deductibility drops from $1 million or less to $750,000 or less for mortgage debt incurred after December 15, 2017. • Home equity loan interest: Despite the initial impression that tax reform fully suspended this deduction starting in 2018, the IRS clarified in February that home equity loan interest remains deductible, subject to usage criteria. Interest from home equity loans, home equity lines of credit (HELOC) and lines of credit may be deductible up to $100,000 as long as the loan proceeds are used to “buy, build or substantially improve” the home that secures the loan. Any other use is not permitted for the deduction. • Charitable contributions: This popular deduction remains an option for taxpayers, subject to income limitations. The income limitation for cash donations to public charities did change from 50 to 60 percent of AGI, but capital gain property donations, like appreciated stock, remains capped at 30 percent AGI. • Miscellaneous itemized deductions: This broad category, which includes investment fees and expenses, professional service fees and unreimbursed business expenses, is repealed through tax year 2025. STANDARD DEDUCTION & PERSONAL EXEMPTION TAX DEDUCTIONS