Welcome to Part 4 of the ol' blog's series on 2018 inflation adjustments.
Today we look at changes to some popular credits and deductions.
You can find links to all 2018 inflation posts in the first item:
Income Tax Brackets and Rates.
Note: The 2018 figures apply to 2018 returns that are due in 2019.
New tax laws also have altered some of the 2018 amounts and are noted in the post below.
For comparison purposes, you'll also find 2017 amounts to be used
in filing 2017 returns due next April.
Millions of taxpayers depend each year on tax deductions and tax credits to cut their annual tax bills.
The main tax reduction strategy is claiming the standard or an itemized amount. Adjustments for the 2018 tax year to these tax write-offs were covered in Part 2 two of my annual tax inflation series.
But there are many other popular tax deductions and tax credits — ranging from Uncle Sam's help for adopting children to paying for schooling to assisting commuters to supporting moderate- and lower-income workers — that filers can use.
Many of these tax breaks also are affected each year by inflation. Here's' how they'll look in 2018.
UPDATE: Much has been written about changes to the child tax credit, including by me in my overview of the changes in the Tax Cuts and Jobs Act that because effective on Jan. 1, 2018. However, the child tax credit is not mentioned in this post because it is not tied to inflation. The amounts eligible parents can claim — now doubled to $2,000 with tweaks for a refundable portion — is set by statute and only Congress can adjust them … or let them expire, as the new law calls for, at the end of 2025.
Adoption tax credit, employer assistance
Ask any parent, having kids costs a lot. There are myriad tax breaks to help moms and dads deal with child-related expenses, including help in the form a tax credit and tax-free employer assistance for folks who grow their families through adoption.
Adoptive parents and those considering adoption got a scare during the recent tax reform debates. There was talk on Capitol Hill of ending the credit. However, after hearing from parents and adoption support groups, lawmakers decided to preserve the federal assistance for adoptive families.
In 2018, a company can provide eligible adoptive parents up to to $13,840 $13,810 in tax-free help to cover associated costs. The drop of $30 was made in March 2018 after the IRS reexamined inflation adjustments in light of the chained Consumer Price Index (CPI), which under the new Tax Cuts and Jobs Act now is the standard to be used for indexing. That's up $270 $240 from 2017's max of $13,570.
Even if adoptive parents don't get help from their employers, they can claim in 2018 an adoption credit of up to $13,840 $13,810. Again, this is an increase (although a smaller one after the chained CPI change) from last year's amount of $13,570.
In addition to the large dollar amount, the beauty of this tax break is that it is a credit, which is better than a deduction because tax credit directly reduces your tax liability dollar-for-dollar.
Both the adoption income exclusion and tax credit amounts will begin to phase out in 2018 when individuals have modified adjusted gross incomes (MAGI*) greater than $207,580. Once the adoptive parents hit MAGI of $247,580, they cannot claim the tax-favored adoption assistance.
*As shamelessly plugged earlier in this 2018 inflation series, you can check out the ol' blog's glossary for more on MAGI, as well as many other tax term definitions.
The 2018 hikes are a substantial $4,040 more than 2017's adoption tax breaks phaseout starting point of $203,540 and elimination level of $243,540.
Depending on the adoption's cost, you may be able to claim both the tax credit and the exclusion. However, you can't double dip; that is, you cannot claim both a credit and exclusion for the same adoption expenses.
Note, too, that the tax credit is not refundable. That means you can use the amount to reduce any tax you owe to zero, but if you have extra credit after that, you won't get it as a refund.
Lifetime Learning Credit
This Lifetime Learning Credit also is nonrefundable, but it's still worthwhile since it can help pay not only higher education costs, but also continuing education courses once you're out of school, such as a class you took to improve your workplace skills.
This educational tax credit is worth a possible maximum of $2,000. However, that amount is reduced if you make what the IRS considers a lot of money.
For the 2018 tax year, the MAGI limit here is $57,000. That's doubled — $114,000 if you're as bad at doing math in your head as I am — if you're married and file a joint tax return. In either situation, hit the MAGI number and you'll lose part of the Lifetime Learning Credit.
At least next year it's $1,000 more than the MAGI trigger of $56,000 for 2017 taxes; $2,000 more than the $112,000 for married joint filers this tax year.
Student loan interest
Among the many costs of raising kids is paying for college. That's why so many students and/or their families take out loans to pay for higher education.
One of the many income adjustments, popularly known as above-the-line deductions, is the ability to offset a portion of those higher education loans. During tax reform discussions, many of the income adjustments were on the chopping block, but the student loan interest one survived.
That $2,500 tax breaks is still in the tax code. And that amount of deductible educational loan interest is set by law, which means in 2018 it's stuck at level.
Another hurdle is that if you make more than a certain amount, you won't even be able to deduct that amount.
In 2018, your student loan interest deduction isn't reduced until you, as a single taxpayer, have MAGI of more than $65,000 or $135,000 if you're married and file jointly. The interest deduction is eliminated if your MAGI as a single taxpayer is $80,000 or more or $165,000+ for married joint filers.
Unfortunately for students and their families going into college debt, those 2018 amounts are unchanged from the 2017 MAGI phaseout and elimination amounts. So if your income goes up next year, you could lose some or all of this tax break.
Savings Bond exclusion for higher education
Savings bonds are another way to help pay for some higher education costs.
Interest earned on eligible Series EE and I bonds issued after 1989 is not taxed as long as the bond owner uses the redeemed bonds to pay qualified higher education expenses at an eligible institution.
In addition to meeting certain requirements, there's also an income limit for the education-related savings bond interest exclusion.
This exclusion will start phasing out in 2018 for those with MAGI of more than $119,550 on joint returns and $79,700 for all other filers. The tax-free savings bond interest exclusion is completely phased out for joint filers with MAGI of $149,550 and $94,700 or more for all other returns.
That's a hike over 2017's exclusion phaseout/elimination of more than $117,250 for joint filers and $78,150 for other taxpayers. This tax year, you cannot claim the savings bond interest exclusion at all if your MAGI as a joint filer is $147,250 or more or is $93,150 or more if you file using one of the other filing statuses.
Educators' expenses deduction
Tax breaks are for more than just students. Elementary and secondary school teachers, along with certain other educators, can claim some of their out-of-pocket classroom expenses as an above-the-line deduction.
This tax break of $250 was made a permanent part of the tax code as part of 2015 tax extenders bill, formally known as the Protecting Americans from Tax Hikes or PATH Act. That law also calls for the allowable expenses amount to be adjusted annually for inflation.
There was concern that this above-the-line deduction also would fall victim to changes in the Tax Cuts and Jobs Act (TCJA). Good news for teachers. It didn't.
But while the deduction is still around in 2018, low inflation meant that it's been stuck at the $250 level. That's the amount for both the 2017 and 2018 tax years.
Transportation fringe benefits
Commuting can tax your patience. But you might get some tax help in getting to and from work.
If your company helps you cover the cost of your commute via mass transit or pays at least part of your parking once you're there, that assistance is tax-free.
For 2018, a workplace transportation fringe benefit of up to $260 is not counted as income to you at tax time. That's $5 more than the $255 allowed in 2017.
Sorry, workers. Under provisions of the new laws, your employer no longer can deduct fringe benefits offered commuting employees by subsidizing some or all of their parking, transit, and vanpooling costs. The new law also suspends bicycle commuting reimbursement from the definition of qualified transportation fringe benefits.
That means that without the business tax break for these employee fringe benefits, many companies probably will eliminate them.
And that means workers will be spending part of any TCJA tax cuts they see on paying for parking and commuting to work.
Earned Income Tax Credit, or EITC
The Earned Income Tax Credit (EITC), created in the 1960s as part of President Lyndon B. Johnson's War on Poverty, is a major tax break for middle- and lower-income workers. It is not changed under the new tax laws.
To claim the EITC in tax year 2018, inflation adjustments mean that your earned and adjusted gross income (AGI) each must be less than:
|Filing Status||No Children||1 Child||2 Children||3 or More Children|
Head of Household
or Surviving Spouse
In addition, if you have what the IRS deems is "excessive investment income," you're not eligible for the EITC. For 2018, that amount is $3,500.
If you do qualify for the EITC in 2018, the maximum credit amounts -- which are refundable, meaning any excess could come back to you, as the name says, as an IRS refund -- are:
- $6,444 for taxpayers filing jointly who have 3 or more qualifying children,
- $5,728 with two qualifying children,
- $3,468 with one qualifying child and
- $520 if you don't have any qualifying children.
To claim the EITC in 2017 your earned and adjusted gross income (AGI) each must be less than:
|Filing Status||No Children||1 Child||2 Children||3 or More Children|
Head of Household
or Surviving Spouse
You also cannot have more than $3,450 in investment income in 2017 and claim the EITC.
If you do qualify for the EITC in 2017, the maximum credit amounts — which are refundable, meaning any excess could come back to you as, as the name says, a refund — are:
- $6,318 for taxpayers filing jointly who have 3 or more qualifying children,
- $5,616 with two qualifying children,
- $3,400 with one qualifying child and
- $510 if you don't have any qualifying children.
Whew! That's a lot of numbers, both for this tax year and adjusted for inflation in 2018. But it's worth checking into whether they can help your cut your tax bill, both for the 2017 tax year and next.