Changes Affecting Individuals and Families

1. The Alternative Minimum Tax Remains

The Alternative Minimum Tax, commonly known as the AMT, was not eliminated. However, the exemption amounts and income thresholds were increased, which meant fewer taxpayers were expected to be affected.

2. State and Local Tax Deductions Were Limited

The deduction for state and local taxes, including property taxes, was capped at $10,000.

This change had a greater impact on taxpayers living in high-cost states such as California, where property taxes and state income taxes can be substantial.

3. Mortgage Interest Deductions Were Reduced

For newly acquired homes, the mortgage interest deduction was generally limited to interest paid on up to $750,000 of qualifying mortgage debt.

Interest on home equity loans was also no longer deductible unless the funds were used to buy, build, or substantially improve the home securing the loan.

4. The Standard Deduction Increased

The standard deduction increased to:

• $24,000 for married couples filing jointly
• $12,000 for single taxpayers

Additional deductions remained available for taxpayers who were age 65 or older or legally blind.

This increase benefited many taxpayers who did not previously itemize their deductions.

5. Personal Exemptions Were Eliminated

The personal exemption deduction was suspended. Families who previously claimed several dependents could feel the impact of this change, although other provisions, such as the expanded Child Tax Credit, helped offset it for some taxpayers.

6. The Child Tax Credit Increased

The Child Tax Credit increased from $1,000 to $2,000 per qualifying child.

A portion of the credit became refundable, and the income phaseout thresholds increased to:

• $200,000 for single taxpayers
• $400,000 for married couples filing jointly

A separate $500 credit also became available for certain dependents who did not qualify for the Child Tax Credit.

7. Most Moving Expense Deductions Were Eliminated

Moving expenses were no longer deductible for most taxpayers. The primary exception applied to certain active-duty members of the military.

Employer reimbursements for moving expenses also generally became taxable income.

8. The Tax Treatment of Alimony Changed

For divorce or separation agreements executed after December 31, 2018, alimony payments were no longer deductible by the paying spouse.

The recipient generally no longer included those payments as taxable income.

9. Individual Tax Rates Were Reduced

The new individual tax brackets were:

10%, 12%, 22%, 24%, 32%, 35%, and 37%.

The highest individual rate decreased from 39.6% to 37%.

10. The Estate Tax Exemption Increased

The federal estate and gift tax exemption approximately doubled, allowing individuals to transfer substantially more wealth without triggering federal estate or gift tax.

Changes Affecting Businesses

11. The Corporate Tax Rate Decreased

The corporate income tax rate decreased to a flat 21%.

This primarily benefited businesses taxed as C corporations. Owners still needed to consider the possibility of double taxation when corporate profits were distributed as dividends.

12. Certain Pass-Through Businesses Received a New Deduction

Owners of qualifying S corporations, partnerships, sole proprietorships, and limited liability companies could potentially deduct up to 20% of qualified business income.

The deduction was subject to several limitations, including the type of business, taxable income, wages paid, and qualifying property owned by the business.

Professional service businesses were subject to additional income-based restrictions.

13. Section 179 Expensing Increased

Businesses could immediately deduct up to $1 million in qualifying equipment and property purchases under Section 179, subject to applicable limits and phaseouts.

This provided closely held businesses with additional flexibility when investing in equipment.

14. Net Operating Loss Rules Changed

Net operating loss deductions were generally limited to 80% of taxable income.

This reduced the ability of some businesses to use current or prior losses to completely offset taxable income in future years.

15. The Individual Health Insurance Penalty Was Eliminated

The federal penalty for failing to maintain qualifying health insurance coverage was reduced to zero beginning in 2019.

While this eliminated the federal penalty, it also raised concerns that fewer healthy individuals would participate in the insurance market, potentially increasing premiums.

Tax Provisions That Remained Available

Several provisions that had been considered for elimination remained in place.

Home Sale Exclusion

Eligible homeowners could continue excluding up to $250,000 of gain from the sale of a primary residence, or up to $500,000 for qualifying married couples filing jointly.

In general, the taxpayer needed to own and occupy the property as a primary residence for at least two of the five years preceding the sale.

Medical Expense Deduction

For the 2018 tax year, qualifying medical expenses could be deducted when they exceeded 7.5% of adjusted gross income.

Educator Expense Deduction

Eligible educators could continue deducting up to $250 of unreimbursed classroom supplies and related expenses.

Student Loan Interest Deduction

Taxpayers could continue deducting up to $2,500 of qualifying student loan interest, subject to income limitations.

Education Tax Credits

The American Opportunity Tax Credit and Lifetime Learning Credit remained available to qualifying students and families.

Electric Vehicle Tax Credits

Federal tax credits for qualifying electric vehicles remained available, although availability depended on the vehicle manufacturer and other eligibility requirements.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit and several other business-related tax incentives also remained available.

What These Changes Meant for Taxpayers

The overall effect of the law depended heavily on each taxpayer’s income, family size, business structure, deductions, location, and financial circumstances.

Some taxpayers benefited from lower rates, larger standard deductions, and expanded credits. Others experienced higher taxable income because of reduced deductions, the elimination of personal exemptions, or the cap on state and local tax deductions.

Business owners also needed to compare the benefits of the new pass-through deduction with the lower corporate tax rate before making decisions about entity structure or compensation.

Speak With a Tax Professional

Tax laws affect every taxpayer differently. A strategy that benefits one individual or business may not be appropriate for another.

The Accountancy can help you understand how tax law changes apply to your income, investments, business, and long-term financial plans.

Contact our team to schedule a consultation.

Editor’s note: This article discusses federal tax provisions introduced for the 2018 tax year. It is preserved for historical and educational purposes and should not be treated as current tax advice.

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