The IRS has revised the inflation adjustments for 2018 to reflect changes made by the Tax Cut and Jobs Act, enacted at the end of 2017. In addition to revising the tax rate schedules, the Act also changed the index to be used to determine the inflation adjustments. The new index — Chained Consumer Price Index for All Urban Consumers (C-CPI-U, i.e., so-called “chained CPI”) – generally grows at a slower pace than the Consumer Price Index for All Urban Consumers (CPI-U) used for 2017 and earlier years.
Some of the more prominent adjustments are listed below.
1. Income tax rate brackets:
|Bracket||Begins at taxable income of|
|Joint Return||Single Return|
|12%||$ 19,050||$ 9,525|
|22%||$ 77,400||$ 38,700|
|24%||$ 165,000||$ 82,500|
|32%||$ 315,000||$ 157,500|
|35%||$ 400,000||$ 200,000|
|37%||$ 600,000||$ 500,000|
2. The standard deduction is $24,000 on a joint return ($12,700 in 2017) or $12,400 on a single return ($6,350 in 2017).
The additional standard deduction for taxpayers who are age 65 or blind is $1,300 (up from $1,250 in 2017); $1,600 for unmarried taxpayers who are not “surviving spouses” as defined for this purpose, up from $1,550 in 2017).
Different amounts for 1 and 2 above may apply to heads of household, married individuals filing separately and returns filed by estates or trusts.
3. Itemized deductions for state and local taxes are limited to $10,000, the mortgage interest deduction for new loans has been limited and most miscellaneous itemized deductions have been eliminated or modified. The phase out for itemized deductions at higher income levels has been eliminated.
4. The personal exemption has been eliminated.
5. The alternative minimum tax (AMT) exemption amount will be $109,400 for joint returns and $70,300 for single returns. The AMT exemption will phase out for joint returns with income in excess of $1 million or single returns with income in excess of $500,000. The AMT rate increases from 26% to 28% for AMT income in excess of $191,100 for joint or single returns.
6. The amount of otherwise depreciable business property that can be expensed is $1 million and begins to phase out if the total value of depreciable property placed in service during the year reaches $2,500,000. However, many assets will qualify for 100% first year depreciation without limitation under another provision of the Act (this provision phases out beginning in 2023).
7. For those with health savings accounts (HSAs), a high deductible health plan must have a deductible of at least $1,350 (up from $1,300 in 2017) and total out of pocket expenses (deductibles, co-payments, and other amounts, but not premiums) of not more than $6,650 (up from $6,550 in 2017) for single coverage or a deductible of at least $2,700 (up from $2,600 in 2017) and total out of pocket expenses of not more than $13,300 (up from $13,100 in 2017) for family coverage. The maximum annual HSA contribution that may be deducted or excluded from income will be $3,450 for self only HSAs (up from $3,400 in 2017) or $6,900 for family HSAs (up from $6,750 in 2017). An additional $1,000 catch-up contribution may be deducted by taxpayers age 55 or older
8. The estate and gift tax exclusion applicable to 2018 will be $11,180,000 (up from $5,490,000 in 2017).
In general, the individual tax changes (although not the change in the inflation index) will expire at the end of 2022 unless extended.