Inflation (and new tax law) effects on 2018 federal tax deductions, exemptions and itemized limitations
Friday, October 20, 2017
Welcome to Part 2 of the ol' blog's 2018 series on tax inflation adjustments.
We started on Oct. 19 with a look at next year's — if there isn't tax reform or cuts by or before then — income tax brackets and rates.
Today we look at standard and itemized deductions, personal exemptions
and limitations on these tax situations that apply to some wealthier taxpayers.
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 April 17, 2018.
Standard deduction amounts edge up: Internal Revenue Service data show that most of us, around 70 percent, claim the standard deduction on our returns instead of itemizing.
That's understandable. It's easier.
There are no bundles of receipts and statements to keep. You simply look on the tax form you use and find the standard deduction amount for your filing status.
Those standard deduction amounts typically are adjusted at least a bit each year to account for inflation. That's again true for the coming 2018 tax year. Knowing the amounts can help in your tax planning.
UPDATE, Dec. 22, 2017: With the enactment of the Tax Cuts and Jobs Act, the standard deduction amounts will nearly double starting with the 2018 tax year.
For 2017 returns, the standard deduction amounts are $6,350 for single filers; $9,350 for heads of households; and $12,700 for married filing jointly couples.
In 2018, those amounts will go to $12,000 for single filers; $18,000 for heads of households; and $24,000 next year for married couples filing jointly.
The new deduction amounts will be indexed for inflation, just as is currently done.
The following table was created before the tax bill was released and revised, so it shows the standard deduction amounts that most taxpayers younger than 65 would have claimed on their 2018 tax returns to be filed in 2019.
I've updated it to add the new 2018 standard deductions under the new tax law that are now effective for the 2018 tax year. That's the first of the three numerical columns.
But since we'll be filing our 2017 tax year returns (or extensions) by mid-April 2018, you'll also find in the final column the 2017 standard deduction amounts to use this year.
Standard Deductions AFTER Tax Law Changes.
USE THESE AMOUNTS TO FILE 2018 TAXES IN 2019
BEFORE Tax Law Changes. Historic inflation amounts for reference only
DO NOT USE THESE AMOUNTS
Standard Deduction Amounts for 2017 tax returns
USE TO FILE YOUR 1040 DUE IN APRIL 2018
|Head of Household||$18,000||$9,550||$9,350|
|Married Filing Jointly||$24,000||$13,000||$12,700|
|Qualifying Widow/Widower (Surviving Spouse)||
|Married Filing Separately||$12,000||$6,500||$6,350|
In the middle are the 2018 inflation amounts issued by the IRS before the new tax laws, the Tax Cuts and Jobs Act (TCJA), were enacted. I left them in for historical, reference purposes only so you can see how the new tax laws changed what would have been in effect.
Again, make sure you use the correct amount for the correct tax year. The amounts in column 1, the 2018 TCJA figures, are for the 2018 year's tax planning purposes. You won't need them to file until you do your 2018 tax return in 2019.
The final column shows the 2017 standard deduction amounts. These are what you'll claim on your 2017 taxes that are due by April 17, 2018 (since next April 15 is on Sunday and Emancipation Day is celebrated the following Monday).
Age adds to deductions: I've been blogging long enough now to know that readers of the ol' blog caught my earlier reference to "most taxpayers younger than 65" when it comes to standard deduction amounts.
The age distinction is important because tax code allows older filers and those who are visually impaired to claim additional standard deduction amounts. You do so by ticking a checkbox on Form 1040 or Form 1040A.
Each added standard deduction amount option is separate for each filer, meaning that an older married couple could check up to four boxes on their joint return. The total number of boxes checked then is used to determine the filer(s) standard deduction amount.
For the 2018 tax year, the additional standard deduction amount for the aged or the blind is $1,300. It goes to $1,600 for filers who are not married and not a surviving spouse. Those 2018 amounts, which did not change under the new tax laws, are slightly larger than for 2017 returns, which are $1,250 and $1,550, respectively for the 2017 tax year.
And if you're a taxpayer filing this year who also can be claimed as a dependent of another filer, your standard deduction amount cannot be more than the greater of either $1,050 or $350 plus your earned income. Relatively low inflation means that's the same as for the 2017 tax year.
Itemized deduction issues: If your total itemized deduction amount is more than your allowable standard deduction amount, then by all means itemize.
That means, unless and until it's changed by Congress as part of tax reform, you can claim on Schedule A such things as medical expenses (as long as they exceed the adjusted gross income, or AGI, threshold), a variety of state and local taxes, charitable donations and miscellaneous expenses (again with a deduction threshold to overcome).
Itemizers generally are homeowners who are paying sizable amounts of tax-deductible mortgage interest and property taxes, as well as state income or sales taxes. Philanthropic folks also can boost their itemized deduction total.
But if you file Schedule A and make a lot of money, then you'll lose some of the value of some of your itemized deductions. This is known as the Pease limitation, one of several laws named after their advocates, in this case the late Rep. Don Pease (D-Ohio) who championed the deduction limits on higher-income taxpayers.
For the 2018 tax year, the Pease limitations are, again based on filing status:
- $266,700 for a Single taxpayer
- $293,350 for a Head of Household filer
- $320,000 for Married Jointly Filing couples or Surviving Spouses
- $160,000 for Married Filing Separately spouses.
UPDATE: The new tax law repeals the Pease limitation starting with the 2018 tax year, so the numbers above no longer apply to taxes this year. That's while I struck them out. However, the Pease provision is still in effect for your 2017 return you file this year.
The Pease amounts also apply to 2017 taxes. The income triggers for the itemized deduction limits on 2017 Schedule A filings are:
- $261,500 for a Single taxpayer
- $287,650 for a Head of Household filer
- $313,800 for Married Jointly Filing couples or Surviving Spouses
- $156,900 for spouses who are Married Filing Separately.
When you hit these itemized deduction income thresholds, your Schedule A amounts for home mortgage interest, state and local tax claims, charitable gifts and miscellaneous deductions is reduced by either 3 percent of your adjusted gross income in excess of your threshold amount or 80 percent of the amount of itemized deductions you otherwise could claim for the tax year.
Don't freak. The IRS has worksheet you can use if you do your taxes by paper. Most of us, though, will let our tax software or tax preparer do the necessary calculations.
Personal exemptions increase: In addition to deductions, either standard or itemized, most taxpayers also claim an exemption amount.
UPDATE: The new tax law eliminates personal exemptions in 2018. The loss of this amount, according to tax writers, should be offset by the new larger standard deduction amounts. Because of this, the income phase out levels for 2018 no longer apply. I've left them in the table, however, since it also show the 2017 tax year amounts, which still are in effect for returns filed this year.
For the 2018 tax year, inflation bumps up the exemption amount to $4,150. That's $100 more that allowed for the 2017 tax year.
Inflation also means changes in 2018 to the income levels at which a high-income taxpayer's personal exemption amount is reduced. Yes, just like with itemized deduction, richer filers get whacked again with exemptions, facing a loss of some and possibly all of this amount based on their bigger AGIs.
This exemption reduction is known in the acronym-happy tax world as PEP, or the personal exemption phaseout.
The table below shows, again based on filing status, the income levels per filing status at which the 2018 PEP begins and the earnings level at which a filer loses his or her personal exemption amount.
|Head of Household||$293,350||$415,850|
|Married Filing Jointly||$320,000||$442,500|
|Qualifying Widow/Widower (Surviving Spouse)||
|Married Filing Separately||$160,000||$221,250|
For the 2017 tax year we're now more than three-quarters through and its returns that are due next April, the PEP income levels at which a filers face reduced or total loss of personal exemption amounts are:
|Head of Household||$287,650||$410,150|
|Married Filing Jointly||$313,800||$436,300|
|Qualifying Widow/Widower (Surviving Spouse)||
|Married Filing Separately||$156,900||$218,150|
Yes, this second on the 2018 tax inflation adjustments series does contain a lot a numbers. Again, that's why I'm breaking it up into separate series posts. Even my eyes, those of a dedicated tax geek, glaze over after a certain point.
But I do hope that these tables and explanations of how both the 2017 and 2018 tax years and we filers are affected by inflation help when you file your 2017 return next year and also make moves to lower your 2018 tax bill.
And stayed tuned! More inflation figures are on the way.
You can read the first part of the 2018 tax inflation series with details on next year's tax rates and brackets, where you'll also find an index of more posts already published or in the works.
My wife died in 2017 and she had a home in her trust. Her home was sold in 2018, with 50% ($243,000) distributed to her husband (a beneficiary). Does he (husband) have to pay Federal and or California state taxes on this $243,000 distribution? There was no other assets involved in her trust. Thanks in advance.
Posted by: LeRoy | Friday, August 10, 2018 at 08:01 PM
Yes, the standard deduction amounts will be inflation adjusted, but under the TCJA the changes will be based on the chained CPI, which generally produces smaller increases.
Posted by: Kay Bell | Tuesday, July 10, 2018 at 11:59 AM
Does the new tax law allow for inflation increases for the size of the standard deduction for 2019 - 2025?
Posted by: Charles Fischer | Tuesday, July 10, 2018 at 11:07 AM
The 50 percent cap on most charitable deductions is 60 percent starting in 2018. But you can carry forward the excess donation amount to future tax years. You have five years to use up the excess donation amount, limited each year to the 60 percent cap, until it is used up. If you can't use up the excess in that time, you lose what exceeds the cap.
Posted by: Kay Bell | Tuesday, March 20, 2018 at 06:29 PM
Hi - regarding a real estate transfer (rental property) to a public charity, can the entire appraised value of the real estate be deducted or is it capped by a specific percent of one's AGI? Let's say the donated property appraised at $100K and the taxpayer AGI was $200K. What amount could be deducted for tax purposes, starting in 2018?
Posted by: Mark | Tuesday, March 20, 2018 at 04:50 PM
Sorry, Tony, but no personal exemptions for anyone regardless of which deduction method they claim on 2018 taxes. That's another reason that there will be fewer folks using Schedule A next filing season. Kay
Posted by: Kay Bell | Wednesday, January 24, 2018 at 12:44 AM
For 2018 tax filings under the new tax bill, the personal exemption is eliminated due to the standard deduction being doubled. So if you itemize, do you still lose your personal exemptions or will the people that itemize be able to claim their personal exemptions?
Posted by: Tony Parker | Tuesday, January 23, 2018 at 08:26 PM
D'oh! No more late night updating for me. Thanks Phil and Holly for pointing this out to me.
Posted by: Kay Bell | Thursday, January 11, 2018 at 12:06 PM
Aren't the instructions reversed in your first table? (The Do Not Use are the new numbers, to be used in 2018 for 2019 filing, and the Use numbers are the numbers we'd have used had the December legislation not been passed.
Totally unrelated - do you know of a site where you'll be able to enter the info from your 2017 tax form(s) (without using identifying info such as SS #'s) and it would calculate what your 2018 tax would be assuming those same numbers? In y case, my itemized deductions are similar year to year (a little less home mortgage interest offset by an increase in property taxes). Losing the individual deduction that you used to be able to use if you itemized deductions seems like the wild card in determining how you'll make out under the new bill for people who have itemized and, as couples, exceeded the new $24,000 standard deduction.
Posted by: Holly Springle | Thursday, January 11, 2018 at 10:14 AM
Oops the Standard Deduction headings 'before' and 'after' new tax changes in the table above are misplaced. Above the error it is correctly stated that AFTER the Tax Cuts and Jobs Act in 2018, those amounts will go to $12,000 for single filers; $18,000 for heads of households; and $24,000 next year for married couples filing jointly.
Posted by: Phil C. | Thursday, January 11, 2018 at 07:54 AM