There are pleasant surprises, like parties, presents and pockets with forgotten cash in them. Then there are unpleasant surprises, like discovering you owe money at tax time. Talk about a sinking feeling! So keep your next tax-filing experience on an even keel. Learn about sweeping tax-reform legislation and how it could impact your 2018 tax return.
The Tax Cuts and Jobs Act of 2017 is bringing big changes. Most will apply to the general public, but a few are specific to the military community. Take a look at the highlights you’ll find below, then do a paycheck checkup using the Internal Revenue Service (IRS) Withholding Calculator. This tool will help you determine the right amount of withholding for your situation, protecting against the unpleasant surprise of having too little tax withheld and facing an unexpected tax bill or penalty next year.
The IRS especially recommends checking your withholding if you are a two-income family, hold two or more jobs at the same time or work only part of the year, claim credits such as the child tax credit, have dependents 17 or older, itemized deductions in 2017, have high income or a complex tax return or had a large tax refund or tax bill for 2017. If two or more of these categories apply to you, consider updating your Form W-4, Employee’s Withholding Allowance Certificate with your employer as soon as possible.
Here’s how the Tax Cuts and Jobs Act specifically affects members of the military community:
- Deployments to the Sinai Peninsula: Service members who served in the Sinai Peninsula of Egypt may qualify for combat zone tax benefits retroactive to June 2015.
- Moving expenses: If you’re a Service member on active duty, you can continue to deduct unreimbursed moving expenses for a permanent change of station (PCS). This is an important exception to the new rule because from 2018 through 2025, most taxpayers can no longer deduct moving expenses. If you move without PCS orders, you cannot use this exception.
- Reserve Service members: Reserve Service members will now be able to deduct unreimbursed travel expenses to attend drill duty only if it takes place more than 100 miles from home.
Here’s a look at how the Tax Cuts and Jobs Act affects individual taxpayers in general:
- Standard deduction increases: The standard deduction increases to $12,000 for singles or those who are married but filing separately, $24,000 for those who are married and filing jointly or a qualifying widow(er), and $18,000 for those who file as head of household.
- Personal exemption deduction is suspended: For 2018, you can’t claim a personal exemption deduction for yourself, your spouse or dependents.
- Itemized deductions changes: Highlights of changes for 2018 include the following, which have been made to itemized deductions you can claim on Schedule A:
° The IRS no longer limits your itemized deductions if your adjusted gross income is over a certain amount.
° You can deduct the part of your medical and dental expenses that is more than 7.5 percent of your adjusted gross income.
° The IRS limits your deduction of state and local income, sales, and property taxes to a combined, total deduction of $10,000 ($5,000 if married filing separately). As members of the military community, your state of legal residence and the state where you own a home will determine how much this change impacts you.
° For debt incurred after Dec. 15, 2017, the act limits the deduction for home mortgage interest to interest on up to $750,000 of home acquisition debt. This new limit doesn’t apply if you had a binding contract to close on a home after Dec. 15, 2017, and closed on or before April 1, 2018. In that case, the prior limit would apply.
° The act suspends, from 2018 until 2026, the deduction for interest paid on home equity loans and lines of credit unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
- Child tax credit increases: For 2018, the maximum credit increases to $2,000 per qualifying child. The maximum additional child tax credit increases to $1,400. And the income threshold at which the credit begins to phase out increases to $200,000 ($400,000 if married filing jointly).
- Credit now available for other dependents: A new credit of up to $500 is available for each dependent who does not qualify for the child tax credit. Also, the maximum income threshold at which the credit begins to phase out increases to $200,000 ($400,000 if married filing jointly).
- Education rules expand: You can now use funds from your 529 education savings plan to pay for K-12 educational expenses at secondary public, private or religious schools with payments capped at $10,000 per student per year. Although federal rules now allow you to use 529 plans for pre-college expenses, check with your plan sponsor to be sure they are making the change.
- Estate tax exemption increases: The estate tax exemption doubles to $11.2 million through 2025, so an estate with a value below the new threshold is clear of taxation when the owner of the estate dies.
- Investment fees no longer deductible: You can no longer deduct investment fees from taxes. If a major part of your financial strategy includes investments and you have substantial investor fees, this could partially offset other tax reductions.
- Alimony or maintenance payment rules change: Beginning in 2019, if you make alimony or maintenance payments you will no longer be able to deduct them from your taxable income and the recipient will no longer have to claim the payments as income. This goes into effect for any divorce or separation agreement signed or modified after Dec. 31, 2018.
- Don’t let tax time rock your financial boat. Make an appointment to receive no-cost, personal support from an accredited Personal Financial Manager or Personal Financial Counselor at your nearest Family Center. Check for the most up-to-date tax forms before planning or preparing your taxes and take advantage of preparation services for the military community through the Volunteer Income Tax Assistance (VITA) program and Military OneSource.