If ever there was a time to invest in tax preparation software, this is it. We’ll tell you about big changes in the tax code along with everything else you need to know about filing your 2018 tax returns.
Table of Contents
- Let’s Start with the Major Tax Changes for 2018
- Do You Need to File a 2018 Income Tax Return?
- Important 2018/2019 Tax Dates
- What Kinds of Income Are Taxable?
- What You’ll Need to File Your 2018 Income Tax Return
- Income Tax Brackets for 2018
- 2018 Personal Exemptions and Standard Deduction Amounts
- Net Investment Income Tax (NIIT) Thresholds on Higher Incomes
- The Alternative Minimum Tax (AMT) for 2018
- The Best Ways to File Your Income Tax Return for 2018
- What If You Need to File an Extension?
- What if You Can’t Pay Your Taxes by the Due Date?
- How Long Will it Take to Get My Refund?
- Final Thoughts on Filing Your 2018 Taxes
This year you’ll see the biggest changes in the federal income tax code in decades. The tax reform act that was passed in December of 2017 has made substantial changes in the code. For that reason, we can’t afford to assume anything we’ve known about income tax preparation in the past is still relevant. There have been enough changes that we’ll need to double check our work at every phase of the process.
That makes a very strong case for using either a professional tax preparer, or for preparing your taxes using a credible tax preparation software plan. Either will enable you to effortlessly stay on top of the dozens of changes that have swamped the tax code.
But whether you plan to rely on a paid preparer, or go the do-it-yourself route with tax preparation software, it will still help to know what the major changes are for filing your 2018 taxes.
Please be aware that the information in this guide is taken from the IRS Form 1040 Instructions Draft that was released on September 26, 2018. The details of the new tax law are still being worked out, and will probably continue to be refined throughout the tax season.
That’s typical with major tax changes, but we still have plenty of information to work with right now. (This is yet another compelling reason to use a good tax preparation software program–they automatically update with the latest changes.)
With that information in mind, let’s look at everything you need to know about filing your 2018 taxes.
Income tax rates and tax brackets have changed significantly for 2018. We’ll get into those in a little bit, but here are major changes in other provisions you need to know about.
Forms 1040EZ and 1040A have been eliminated. All taxpayers are required to file on Form 1040.
Qualified business income deduction. This is brand new for 2018. You may be able to deduct up to 20% of your qualified business income from your qualified trade or business, plus 20% of your qualified real estate investment trust dividends, and qualified publicly traded partnership income.
This is an additional deduction for the self-employed, over and above either the standard deduction or itemized deductions. The deduction phases out with incomes between $157,500 and $207,500 for singles, and between $315,000 and $415,000 for married filing jointly.
Child tax credit increase. For 2018 the child tax credit is increased to $2,000 (from $1,400 in 2017). The phase-out for the credit begins at a modified adjusted gross income of $200,000, or $400,000 if married filing jointly.
There’s one thing in the 2018 tax code that hasn’t changed, at least not yet, and that’s the ACA penalty for not having health insurance coverage. The penalty is due to expire in 2019, but it still applies for 2018.
This question is more important in 2018 than ever. The dramatic increase in standard deductions has substantially raised the income required for filing a tax return. With that increase, you may find you don’t need to file a return.
Below are the tax threshold amounts for 2018. However, read a bit further down for additional situations where you may still need to file, even if your income is below the thresholds.
- Single, under 65 – $12,000
- Single, 65 or older – $13,600
- Married filing jointly, both spouses under 65 – $24,000
- Married filing jointly, one spouse 65 or older – $25,300
- Married filing jointly, both spouses 65 or older – $26,600
- Married filing separately, any age – $12,000
- Head of household, under 65 – $18,000
- Head of household, 65 or older – $19,600
- Qualifying widow(er) with dependent child, under 65 – $24,000
- Qualifying widow(er) with dependent child, 65 or older – $25,300
Even if your income is below these thresholds, you may still need to file a return if any of the situations below apply to you:
- You had at least $400 in self-employment income
- You owe household employment taxes
- Social Security and Medicare taxes are owed on unreported tip income
- You received a distribution from a medical savings account (MSA) or a health savings account (HSA)
- You received an advance payment on the Premium Tax Credit
- Expect to qualify for the earned income tax credit (EIC)
- You’re claiming education credits, and must file to be refunded under the American Opportunity Credit
- You want to claim a refundable Health Coverage Tax Credit
- You adopt a child, and want to claim the Adoption Tax Credit.
- You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer Social Security and Medicare tax.
If you’re still not sure whether or not you need to file a return, you can use the Do I Need to File a Return tool offered by the IRS.
How Do You Know if Your Child May be Subject to the “Kiddie Tax”?
The so-called Kiddie Tax applies only if your child has investment income that exceeds certain thresholds. It only applies to dependents who are either under the age of 19, or are full time students under the age of 24.
Earned income limits for your child or children are the same as they are for adults. But if your child has significant investment income, the Kiddie Tax may come into play. That’s true even if his or her earned income doesn’t rise to the level of needing to file.
Below are the thresholds for 2018:
- First $1,050 – no tax due (unearned income exemption)
- Above $1,050 – income taxed at the child’s rate
This is a significant change from 2017, when a child’s unearned income would need to be taxed at the parents rate if it exceeded $2,100.
Below are important dates for filing your 2018 income tax return, as well as additional dates that may be important for filing your 2019 return next year:
- January 15, 2019 – Last federal income tax estimate due for the 2018 tax year
- April 15, 2019 – First quarter federal income tax estimate due for the 2019 tax year
- April 15, 2019 – Deadline for filing 2018 Individual Income Tax returns
- April 15, 2019 – Last day to make a 2018 IRA contribution (Keogh and SEP contributions can be made as late as October 15, 2019, if you file for an extension)
- June 15, 2019 – Second quarter federal income tax estimate due for the 2019 tax year
- September 15, 2019 – Third quarter federal income tax estimate due for the 2019 tax year
- October 15, 2019 – Extended individual income tax return due for 2018
- January 15, 2020 – Fourth quarter federal income tax estimate due for the 2019 tax year
Retirement plan contribution deadlines vary according to the type of plan you participate in. The final contribution due dates for various plans are as follows:
- IRAs – Your contribution must be made by April 15, 2019.
- Keogh and SEP IRAs – Contributions can be made as late as October 15, 2019, as long as you have filed for an extension on your taxes by April 15.
- Employer sponsored 401(k) and 403(b) plans – Contributions were required to be made by December 31, 2018 for 2018.
The most common forms of taxable income include:
- Wages and salaries
- Income from self-employment
- Tips and gratuities
- Unemployment benefits
- Moving expense reimbursements
- Canceled or forgiven debt
- Alimony (which is also tax deductible if you pay it)
- Income from bartering arrangements
- Gambling winnings
- Pension, annuity and retirement plan income
- Social Security benefits
- Interest and dividends
- Capital gains on the sale of investments or investment securities
Income sources that are NOT taxable include:
- Child support
- Insurance proceeds (in most cases)
- Veterans benefits
- Aid to Families with Dependent Children (AFDC)
- Meals and lodging for the convenience of your employer
Gathering all the necessary documentation to file your income tax return is probably the most complicated part of the process. But once you have all the documentation you need in one place, it’s just a matter of filling in the blanks–at least if you’re using tax preparation software.
Basic information you’ll need to have available includes:
- Complete copies of your 2017 income tax return. You may need these to provide certain information, particularly any carryforward numbers, such as those related to business losses or capital loss carryforwards.
- Social Security numbers for you, your spouse (if you’re married filing jointly or separately), as well as each of your children or other dependents.
- Your ex-spouse’s Social Security number if you receive or pay alimony or child support.
- If you didn’t have health insurance, you’ll need a marketplace exemption certificate (you may be required to pay a penalty for 2018 if you didn’t have coverage for part or all of the year).
Income documentation you’ll need to prepare your return includes:
- W2s from any employment sources
- Income information for your dependent children (W2s, 1099s, etc.)
- 1099-MISC for additional income for which income taxes were not withheld (like contract, gig, or freelance income)
- 1099s reporting Social Security income, interest and dividends; pension, IRA or annuity income; state income tax refund or unemployment insurance; or reporting the sale of stock or other securities
- K-1’s reporting partnership or S-Corporation income
- W-2G reporting gambling winnings (you should also have records proving gambling expenses)
- Documentation of alimony received, including the Social Security number of the payee
- If you’re self-employed, a complete accounting of all your business income and expenses
- Evidence of rental income received, if you own investment property
Documentation You’ll Need for Tax-deductible Expenses
As noted earlier, far fewer people will be able to itemize their deductions under the new tax law. But if you think you still can, you’ll need to gather the following documents:
- 1098 reporting mortgage interest and property taxes paid, educational expenses, and student loan interest paid
- Statements from charities reporting contributions
- 1095-A, 1095-B, or 1095-C, reporting health insurance premiums paid, and to whom
- Various forms 5498 reporting IRA, HSA or ESA payments made during the year
- Home office information (if you plan to take the deduction) – square footage of your office, and of your home
Additional Expense Documentation You May Need
There are additional expenses that may be tax deductible, however they may not be provided by a third-party reporting source. If that’s the case, you may also need to gather the following documents:
- Expenses for rental property
- Documentation for the purchase of depreciable assets for business or investment activity
- Property taxes paid but not reported on Form 1098 by a lender
- Federal and state estimated tax payments made for the tax year
- Cost basis of investments sold (if the information is not provided by a broker)
- Indirect expenses related to investment activity
- Documentation of alimony paid
- Receipts from the purchase of energy efficient equipment installed in your home
- Charitable contributions made but not reported by the receiving organization
- Mileage driven for business, employment, medical or charitable activities, as well as records of payment for tolls, parking and ad valorem taxes
- Evidence of payment of health insurance, out-of-pocket medical, dental and vision expenses, medical mileage and long-term care insurance
- Childcare expenses paid, if not supplied by the provider (including the provider’s tax id number)
- Wages paid to a domestic care provider, including that provider’s tax ID number
- An itemized list of higher education expenses paid out-of-pocket, with documentation
- Cost of preparation of last year’s income tax returns
- Sales tax paid on major purchases (which may not apply due to the new limit on state and local taxes)
The various income tax brackets and rates for 2018 have changed completely since 2017. There are just as many brackets as there used to be, but the dollar amounts and tax rate percentages have changed.
The tax rates are now 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
This is a complicated topic, and worthy of an entire discussion all its own. You can check out our article 2018 Federal Income Tax Brackets and Standard Deduction (UPDATED) for full details.
The beloved personal exemption, which was $4,050 in 2017, has been eliminated under the new tax law. Technically speaking, it can be argued that the exemption was simply rolled into the standard deduction. But since the standard deduction is a flat amount, the change will be a disadvantage to anyone who has several dependents.
Be that as it may, we have to work with the tax code as it currently exists.
Compared to 2017, the standard deduction has been roughly doubled across the board. That’s to ease the pain of the missing personal exemptions. This will be an advantage to anyone who has never been able to itemize deductions in the past. But if you have, you may no longer be able to for 2018 and subsequent years.
The higher standard deduction means the number of taxpayers who itemize is expected to fall from 46.5 million in 2017, to just 18 million in 2018. Put another way, only about 12% of taxpayers will be able to itemize their deductions in 2018.
For 2018, standard deduction amounts are as follows:
- Married filing jointly and surviving spouses – $24,000
- Heads of household – $18,000
- Married filing separately – $12,000
- Single – $12,000
There’s a piece of really good news for high income taxpayers who itemize their deductions. Until 2017, itemized deductions were phased out for high income taxpayers. But under the new tax law, the phaseout has been eliminated.
Other Changes in Deductions for 2018
The new tax law reduces or eliminates several popular deductions for 2018:
The mortgage interest deduction. Under previous tax law, you were permitted to fully deduct interest paid on a home mortgage of up to $1 million. And if you took your mortgage prior to December 15th, 2017, you can continue deducting mortgage interest under those terms.
But for any home indebtedness taken after that date, you can take a deduction for mortgage interest paid on indebtedness up to only $750,000. If you’re married filing separately, the interest deduction is limited to indebtedness of no more than $350,000.
Deduction for state income, real estate and sales tax is limited. Under the previous tax law, there was no limit on how much you could deduct for state and local income and real estate taxes. However, for 2018, your deduction is limited to $10,000 if you are married filing jointly, or $5,000 if you’re single. That includes all taxes, such as state income tax, sales tax, and real estate taxes on your primary or secondary residence.
Other expenses that were deductible through 2017 that have been completely eliminated includes:
- The deduction for job related expenses and other miscellaneous deductions.
- The deduction for qualified tuition and fees.
- Deduction for mortgage insurance premiums.
Medical expense deduction. Taxpayers who itemize their deductions have limits on deductions for medical expenses. For the tax years 2017 through 2018, taxpayers can deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income.
Mileage allowances. The mileage allowances for 2018 are as follows:
- Business mileage – 54.5 cents per mile
- Charitable mileage – 14 cents per mile
- Medical and moving mileage – 18 cents per mile
When the Affordable Care Act (ACA) was rolled out in 2010, various funding mechanisms were put in place to help pay for it. One is known as the Net Investment Income Tax, or NIIT. It extends the Medicare tax on investment income, at an annual rate of 3.8%.
The tax is imposed on investment income if you earn in excess of certain thresholds. Those thresholds are the same as they were in 2017, and are as follows:
- Married filing jointly – $250,000
- Married filing separately – $125,000
- Single – $200,000
- Head of household – $200,000
- Qualifying widow(er) with dependent child – $250,000
If your adjusted gross income exceeds these thresholds, the tax will be applied to net income from rents, royalties, interest and dividend income, capital gains, and annuities. It will also apply to any passive income from your trade or business.
Fortunately, the tax doesn’t apply to all unearned income. For example, it is not assessed on income from Social Security, pensions, or on any gain on sale of your primary residence.
Not one person in 100 has even a remote concept of how this works. Most accountants couldn’t even calculate it–that’s how complicated it is. But millions may be subject to the AMT, and that’s why you should have at least a high-altitude idea of what it is.
Basically, the AMT is designed to prevent taxpayers from escaping their fair share of tax liability through tax breaks. This can include either preferential income, or excessive deductions. It imposes a higher tax rate based on those income and deduction amounts.
The AMT applies beginning at the following income thresholds:
- Married filing jointly and surviving spouse – $109,400 (exemption phase-out begins at an income of $1 million)
- Single – $70,300 (exemption phase-out begins at an income of $500,000)
- Married filing separately – $54,700 (exemption phase-out begins at an income of $500,000)
The AMT is one of the most compelling reasons to use tax preparation software, particularly if you’re a high income taxpayer.
If you’ve found the tax code to be more than a little bit complicated in the past, it’ll be even more so in 2018, due to the many changes.
Hopefully, you’re not still preparing your income taxes manually. Even if you have a very simple tax return, it can turn into a nightmare with these changes. The revisions in tax code for 2018 aren’t simply adjustments to brackets and thresholds. Some changes have eliminated or restricted deductions, while others have made fundamental changes in the way returns are filed.
DIY Tax Preparation Software
Tens of millions of people are now preparing their tax returns using tax preparation software. This is an excellent strategy, since the software will fully incorporate all tax changes for 2018. You simply have to fill out the information requested, and the software will handle all the technicalities for you.
In addition, you’ll be able to either e-file or print your return, so it will be complete for filing. The software will even direct you where to send your return, as well as prepare a payment coupon if you owe additional tax. It will even calculate the IRS penalty, so you can pay it with your return, and not have to face a disturbing letter from the IRS while you’re trying to relax and enjoy your summer.
Tax preparation software has evolved to the point that it can handle many of the most complicated tax returns. This can include those that involve rental real estate, partnership interests, and self-employment. And if you need to make tax estimates, the software will both print IRS forms 1040ES, as well as instructions on where to send your estimated payments.
Some of the best tax preparation software available includes TurboTax, H&R Block, and TaxAct, among others. You can read all about them in our article Comparing The 5 Best Tax Software Programs and choose the one that will work best for you.
If cost is your biggest concert, here’s where you can find the cheapest tax software. This can be an excellent starting point, because most tax preparation software plans have free versions. You can investigate those versions, as well as consider any premium services they offer for more complicated returns.
Using a Professional Tax Preparer
If you don’t feel comfortable preparing your own taxes using one of the popular tax preparation software plans, you can always opt to have your return prepared by a tax professional. This may be the preferred way to go if you have an especially complicated tax situation, and even more so if you’re concerned about the risk of an IRS audit.
If you hire a professional, you should either go with a CPA, or an enrolled agent.
Certified Public Accountant. CPAs are trained tax professionals. Not only do they have access to a wealth of information on the tax code, but they also regularly attend training sessions to keep them current on the latest changes and complications, and use some of the most advanced tax software available.
They can handle the most complicated tax situations, and even represent you before the IRS in the event of an audit. The disadvantage to using a CPA is that they are generally the most expensive tax preparation option, and by a wide margin at that.
Enrolled agents (EAs). These are professional tax preparers who are licensed to prepare taxes, as well as to represent you before the IRS in an audit. They’re a less expensive way to get your taxes prepared by a third party. And while many are very good at what they do, the standards are not necessarily as high as they are for CPAs.
How to Get Access to a Tax Professional Without Paying the Higher Fee
If you don’t want the expense and complication of working with a professional tax preparer, you can still consider using a tax preparation software. Some services, like TurboTax and H&R Block will provide direct professional tax preparer assistance in the preparation of your return for an additional fee.
With TurboTax, that can mean having either a CPA or an enrolled agent remotely accessing your computer to help you prepare your return. In the case of H&R block, you can move the preparation over to a preparer at one of their thousands of offices across the country. And either service can provide audit representation before the IRS for an additional fee.
You can request an extension, and it will be granted automatically. You can do this by filing IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. It must be filed no later than midnight, April 15, 2019.
By filing the form, you’ll get an extension through October 15th, 2019. That will give you a full six months to complete your return. But don’t wait until the last minute if you plan to file by October 15th. There are no more extensions beyond that date.
It’s also vitally important to understand the extension applies only to the filing of your tax return. It does not give you an extension to pay any income tax you owe. If you don’t make your full tax payments by April 15th, interest in penalties will be assessed on the unpaid balance.
If you owe more than you can pay by the due date, you do have a couple of payment options.
Request more time to pay. The IRS will provide up to 120 days to pay the amount of tax you owe. To do this, you will need to contact the IRS and request additional time to pay. This request must be made and approved prior to the tax filing date.
Set up an installment payment plan. If you won’t be able to pay the tax due within 120 days, you can apply for an Installment Agreement with the IRS. This will give you up to 72 months to pay your tax debt. But if the amount due is greater than $25,000, you will need to complete a financial disclosure.
Whether you’re permitted more time to pay your tax bill, or you set up an installment agreement, interest and penalties will apply to the unpaid balance. It’s not a perfect arrangement, but at least you can rest assured knowing you won’t go to debtor’s prison because you can’t pay your taxes!
If you file your return electronically, the refund is generally processed within 21 days of the e-file acceptance date. If you file a paper return, it will take between six to eight weeks.
You can use the IRS Where’s My Refund tool to track the progress of your refund. However, if you use tax preparation software, the software itself may track your refund, and let you know when to expect its arrival.
This is everything you need to know about filing your 2018 taxes–at least subject to any last minute revisions. Unless you’re prepared to pay the high fees of a professional tax preparer, we strongly recommend you choose tax preparation software that looks to be a comfortable fit. There’s been too many changes in the tax law, and a few more that haven’t been quite worked out yet. Good tax preparation software will take care of all the details for you.Topics: Taxes