Surprises for 2018 Taxes
Peter VanderWoude, MS. CPA, CGMA
August 1, 2018
Most taxpayers will pay less federal income taxes for 2018. There are, however, some changes in the new tax law that will cause some of us to pay higher taxes. Let’s look at a few surprises.
Are you an employee that is required to drive, other than commuting, thousands of miles in your own vehicle for work? Perhaps your employer gives you a monthly allowance, but it does not nearly reimburse you for your business mileage at the current IRS rate of 54.5 cents a mile. Perhaps you have other unreimbursed employee expenses, job search expenses and investment expenses. In past years you would have claimed those expenses as a miscellaneous itemized deduction. Hate to break it to you for this year, that deduction is gone!
A second surprise is deducting interest on home equity loans we used to pay off high interest credit cards or for vacations, etc. Unless we used home equity loans to improve our home or to finance our business, we can no longer deduct that interest.
Not a surprise, because it has been highlighted in previous articles, is that we are limited to deducting just $10,000 for state income tax and real estate taxes. This will reduce itemized deductions for many taxpayers in New York State. Who will be hurt by this limitation? Probably those taxpayers on the upper end of the earnings spectrum whose loss of itemized deductions in 2018, compared to previous years, will exceed the benefit of the new tax law’s lower income tax rates. We will review two taxpayer situations where federal income tax will increase in 2018.
A married couple, without children, earns wages of $175,000 in both 2017 and 2018. This couple has $24,000 in state and local taxes and $20,000 in other itemized deductions. In 2017, their federal taxable income would be $122,900 and federal income tax, $22,203. For 2018, this couple would have federal taxable income of $145,000 and federal tax of $23,779, an increase of $1,576 in tax due over the previous year. If this couple had two children, the tax liability would decrease in both years to around $20,000. This is due to the new child tax credit for 2018 not phasing out at their income level.
A single homeowner, who earns wages of $100,000 in both 2017 and 2018, has high unreimbursed employee business expenses of $10,000, home equity loan interest of $1,000 and $12,000 in state and local taxes. In 2017, itemized deductions and personal exemption were $32,050, federal taxable income was $67,950 and tax liability, $12,733. Under the new tax law for 2018, those same itemized deductions would be limited to $15,000. Federal taxable income would then be $85,000 resulting in federal tax of $14,690, an increase of nearly $2,000 over the previous year.
Hopefully, you will not experience an unpleasant surprise at tax time. If you have any concerns, please contact your tax professional.