Tax Updates for the 2018 Filing Season

Changes to Taxes for 2018 from the Tax Cuts and Jobs Act: In addition to lowering the tax rates, some of the changes that affect you and your family include increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, and limiting or discontinuing certain deductions. Additional information on the tax reform can be found in IRS’ 12 page Publication 5307, Tax Reform Basics for Individuals and Families, which can be found here.

Tax Forms: Form 1040 is a shorter, simpler form for the 2019 tax season. It replaces the old Form 1040, as well as the Form 1040A and Form 1040EZ.

Tax Rates: For 2018, most tax rates have been reduced, meaning most people will pay less tax compared to previous years. The new individual income tax rate structure is: 10%, 12%, 22%, 24%, 32%, 35%, and 37%, effective for taxable years beginning after December 31, 2017, and before January 1, 2026. A comparison of the previous tax rates to the new ones can be seen in the tables below.

Personal Exemptions: The deduction for all personal exemptions is suspended (reduced to zero), effective for taxable years begin­ning after December 31, 2017, and before January 1, 2026.

Standard Deductions: The standard deduction for taxpayers who do not itemize deductions on Schedule A (Form 1040) has increased. The standard deduction amounts for 2018 are:

$24,000 – Married Filing Jointly or Qualifying Widow(er) (increase of $11,300)

$18,000 – Head of Household (increase of $8,650)

$12,000 – Single or Married Filing Separately (increase of $5,650)

State & Local Tax Itemized Deduction: If you are itemizing your deductions, rather than utilizing the standard deduction, there is a combined limitation for an individual of $10,000 ($5,000 if Married Filing Separately) on real prop­erty taxes, personal property taxes, and income taxes or general sales taxes that are unrelated to a business.

Mortgage Interest Itemized Deduction: The deduction for home equity debt is disallowed as a mortgage interest deduction unless the home equity debt was used to build, buy, or improve the taxpayer’s qualified residence. That means that if you used a loan secured by your home to pay personal expenses, such as credit card debts, or buying a boat or car, the interest on that loan is not deductible. The total amount allowed as a deduction for home mortgage interest is limited based on home acquisition debt of up to $750,000 ($375,000 if Married Filing Separately).

Child Tax Credit: The maximum credit per qualifying child is $2,000 (increase from $1,000). A new credit for other dependents of up to $500 is available for each dependent who doesn’t qualify for the child tax credit. The taxpayer must still include a valid Social Security number (SSN) for each qualifying child for whom the maximum $2,000 credit is claimed, and that SSN must also have been issued by the due date of the tax return (including extensions). A qualifying child who is ineligible for the child tax credit because that child did not have a valid SSN, or did not have a valid SSN by the due date of the tax return (including extensions) may still qualify for the non-refundable $500 credit.

Alimony: For any divorce or separation maintenance instrument executed after December 31, 2018, (or executed on or before December 31, 2018 and modified after that date if the modification expressly provides that the amendments made by the Tax Cuts and Jobs Act, Section 11051, apply to such modification), alimony and separate maintenance payments are no longer deductible by the payor spouse. Additionally, alimony and separate maintenance payments will no longer be included in income by the recipient of the payments.

Extensions to Tax Deadlines

If you can’t file your federal tax return by the 15 April 2019 deadline, then consider filing for an extension. Filing extensions are more common than you may think. But there are certain things you should know when you request a penalty-free extension for your federal taxes, including what kinds of extensions require you to pay any tax you owe upfront and those that allow you to delay payment.

There are three types of extensions available to service members:
• A 6-month extension will be granted if you apply for this extension using IRS Form 4868 before the regular due date for filing your return (15 April). An extension of time to file doesn’t mean you have an extension of time to pay any taxes due. If you owe taxes and don’t pay them along with your application for extension, you will be charged interest from the date the payment was due.

• If your duty post is outside the United States or Puerto Rico, you qualify for an automatic two-month extension without having to request an extension via IRS Form 4868. To receive this extension, you must attach a statement to your return explaining your situation and how you qualify for an extension. If you can’t file your return within the two months, you can request up to another four-month extension. If you owe taxes, your interest will start accruing from the date the payment was originally due (15 April).\

• If you are serving in a combat zone or contingency operation, an automatic extension can be granted for filing your tax return, paying your owed tax or filing a claim for a refund. First, this deadline is extended for 180 days after leaving the eligible area or after that area is no longer designated a combat zone or after your operation is no longer considered a contingency operation. Second, in addition to the 180 days, the deadline is extended by the number of days that were left for you to take action with the IRS when you entered a combat zone (or began performing qualifying service outside the combat zone) or began serving in a contingency operation. If you entered the combat zone or began serving in the contingency operation before the period of time to take the action began (usually 3.5 months from January – 15 April), your deadline is extended by the entire period of time you have to take the action. Thus, if you were deployed in a qualifying area the for the whole tax filing period, you’d have roughly a 9 ½ month extension (180 days plus 3 ½ months) from the date you left the qualifying area.

Don’t forget to address your state tax deadline too. Filing a federal tax return extension does not necessarily mean you get an extension of your state tax deadline. Check with your state for their extension process.

The late payment penalty is usually 0.5% of any tax not paid by the regular due date of your return, which is April 15, 2019, for calendar year filers (April 17, 2019, if you live in Maine or Massachusetts). It’s charged for each month or part of a month the tax is unpaid. The maximum penalty is 25%.

A late filing penalty is usually charged if your return is filed after the due date (including extensions). The penalty is usually 5% of the amount due for each month or part of a month your return is late. The maximum penalty is 25%. If your return is more than 60 days late, the minimum penalty is $210 (adjusted for inflation) or the balance of the tax due on your return, whichever is smaller