Income Tax Changes for 2018

The Tax Cuts and Jobs Act of 2018 will impact everybody.  While busy gathering your papers for your 2017 tax filing, you are probably also asking yourself if you will have to do this again for 2018 - considering that standard deductions will almost double for federal tax returns and many other deductions have been limited, removing the need to itemize your deductions for federal tax returns.

But California's tax rules do not yet mesh with these significant federal changes.  So, "Yes" is the answer.  Many of us will still need to gather that data to itemize deductions for our state tax returns.  

California's income tax rules generally won't change unless the state legislature passes a bill to adopt some or all of the federal changes.  We should know more by September 2018.  As this article is being written, it is not known yet how much California will conform - if at all.

Property Taxes
The good news is that this means that you may still be able to deduct all your property taxes from your state tax return.

Mortgage Interest
Your mortgage interest would not be limited to acquisition debt on a primary or second residence of $750,000.  This new limit applies for loans incurred as of December 16, 2017.  Your new or existing home equity loans would still be deductible, as they have been in the past.

Unreimbursed Expenses
Those unreimbursed employee business expenses (which are now not deductible for federal returns) would be deductible in California returns, subject to the 2% AGI (adjusted gross income) test, as always.  This includes deducting job-related mileage (not including personal commuting to and from home to the workplace), long-distance travel expenses, uniforms and work clothes, continuing education expenses required for a current job, expenses for job searches for the same occupation, work-related dues (including union dues), subscriptions, a home computer used for work and home offices used for the convenience of the employer...to name a few.  If your unreimbursed employee business expenses were the bulk of your itemized deductions in the past for federal purposes, you will probably see a federal tax bill, or a substantially small refund, for tax year 2018.

Other Deductions Gone
Also, there are broker fees paid to your financial advisor, tax preparation fees and other legal deductible fees that may count for California but not for your federal tax returns.  Some of these federal limitations and eliminated write-offs will end in 2025, unless extended by another Congress.  In nine years the provisions affecting most citizens will revert automatically to the rules now in effect for 2017.

Federal Tax Brackets
For 2017 through 2025 there are still 7 tax brackets, but they have been expanded and tax rates lowered.  The lowest tax rate remains at 10%, and the next tax rate is 12% (not 15%) followed by 22% (from 25%) and so on.  Our highest tax rate is now 37% (not 39.6%).

Exemptions and Credits
Many will see a higher refund next year, but not as big as it would have been if the family member exemption was kept in place.  To make up for that, each dependent child under age 17 will give you a $2,000 tax reduction (or if you owe no taxes, a $1,400 refundable tax credit).  nd there's a new $500 credit for each "other" dependent, such as your college kids or elderly parent.  More people will qualify to receive these tax credits.  The income limitations are expanded to those earning six figures!

Check Your W-4
By the end of February there will be a payroll withholding change for working people due to these federal changes.  You may see a higher amount on your paycheck.  Make sure that the allowances are still correct on your W-4 form at work, after discussing changes of the law with your tax practitioner.  If necessary, fill out the new form W-4, which will be available soon  It may actually work against you if you don't review it and update it.  Receiving more now in your paycheck but losing deductions and some value in your dependents may create a larger tax bill next year, when filing your 2018 tax returns.  This goes double if you have more than one employer.  Be sure to change all the W-4 forms that need it.

Wealthy Benefits
For those with more assets, long-term capital gains and qualified dividends are unchanged...which is very favorable for those who receive them.  From 2018 to 2025, estates under $10 million are exempt from federal estate taxes ($11.2 million when indexed for inflation).  The old law gave exemptions to estates under $5.6 million.  In addition, there are many benefits for estates and trusts of the very wealthy.

Business Tax Rates
Last, but by no means least, the corporate tax rate was lowered to a flat 21% from 35%.  There are also many new and favorable business deductions.  Those should be discussed at length with your tax accountant.

Reprinted with permission from Marie Mastrocinque, EA and The Mountain Enterprise