FARGO — As promised, the standard 1040 U.S. Individual Income Tax Return form for 2018 is the size of a large postcard. However, tax officials and preparers say filing 2018 taxes may still be far from “EZ.”
One of the primary goals of the 2017 Tax Cuts and Jobs Act was to simplify the filing process, but Adam Sweet, a principal with Eide Bailly, said he expects his firm to field more questions than usual this year.
“There is a little bit of uncertainty about what the tax liability will be for people. We’ll see in the coming years what happens, but this year I think there is more of a need for competent tax professionals than there has ever been,” Sweet said.
FEDERAL CHANGES
Based on information gleaned from the IRS website, here is a primer on some of the changes coming for individuals and married couples filing 2018 federal returns:
ADVERTISEMENT
Standard Deduction doubled: The TCJA nearly doubled the standard deduction, from $6,500 to $12,000 for individual filers and $13,000 to $24,000 for joint filers.
Child tax credit expanded: The TCJA doubled the child tax credit from $1,000 to $2,000. It also raised the income threshold to $400,000. Previously, couples filing jointly with income over $110,000 were ineligible for the credit.
Both of these moves were meant, in part, to encourage taxpayers to take the standard deduction rather than itemizing deductions. Doing so should eventually make the filing process easier for taxpayers, tax preparers and the IRS.
Taxpayers are still able to itemize deductions on their 2018 federal return, but it would only be advantageous to do so if the deductions equalled more than the standard $12,000 deduction for individual filers or $24,000 for married couples filing jointly.
In a “trade-off” for the larger standard deduction, Sweet said the TCJA changed or eliminated the following itemized deductions:
State and local taxes: Congress has set a $10,000 cap on the the amount of state and local taxes that can be deducted.
Mortgage interest: The TCJA reduced the amount of mortgage debt filers can deduct interest on from $1 million to $750,000. A change was also made to interest on home equity loans. Homeowners may now only deduct interest on home equity loans that were used to buy, build or improve their home.
Miscellaneous deductions: The entire category of miscellaneous itemized deductions was eliminated, according to Sweet. One popular deduction often included was unreimbursed employee expenses for mileage, travel and home office expenses. Sweet explained that it was eliminated because small expenses often did not add up to a large overall deduction. “Often times, you might look at a return and there was 30 or 40 little things that went into that deduction. From the IRS standpoint, it was hard to audit and check compliance on that when someone shows up with 100 receipts worth $30-$40 a piece,” Sweet said.
EFFECTS ON STATE TAXES
The federal changes will affect North Dakota and Minnesota residents differently. While North Dakota practices rolling conformity — meaning North Dakota laws mirror federal tax laws — Minnesota follows static conformity.
Cynthia Bauerly, commissioner of the Minnesota Department of Revenue, explained that Minnesota statutes follow the federal tax laws as established in 2016.
“Our law is connected to the tax code at the federal level as it was last changed on December of 2016. It takes a bill to be enacted in Minnesota for us to match the federal law change,” Bauerly said.
This means Minnesotans are still likely to itemize deductions on their state return.
“One thing we want to make sure Minnesotans understand is that because of the difference between the state and the federal law, Minnesotans can claim that new larger (standard) deduction at the federal level and still choose to itemize in Minnesota. We know those itemized deductions can be very important,” Bauerly said.
ADVERTISEMENT
She advises Minnesotans to visit the department’s website at www.revenue.state.mn.us for forms and more information.
In North Dakota, some taxpayers will pay more in state taxes as a result of TCJA changes. North Dakota Tax Commissioner Ryan Rauschenberger explained that those with dependents will pay more in state tax due to a change from a dependent exemption that reduces taxable income to a child tax credit. He used the example of a married couple with four dependents making $150,000 and filing jointly. Based on TCJA changes, the couple should typically see a $7,734 decrease in their federal taxes and pay $284 more in North Dakota state taxes.
“Why did I support this? Somebody taking home $7,700 more a year, it’s tough for me not to support that,” Rauschenberger said. ”Out of $150,000, they’ll pay $284 more per year in state income tax. … I think the added benefit of the federal deduction far outweighs any increase at the state level.”
CHANGES FOR BUSINESSES
The following federal income tax changes will affect businesses:
Depreciation: Businesses can now depreciate 100 percent of the cost of a business asset in the year it was purchased. Previously, businesses were required to depreciate the asset over its expected lifespan.
Corporate tax rate: The TCJA reduced the top corporate tax rate from 35 percent to one flat rate of 21 percent.
Section 199A: The TCJA also created a new 20-percent qualified business income deduction for many owners of sole proprietorships, partnerships and S corporations. The deduction — referred to as the Section 199A deduction — is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers.
Meals and entertainment: Businesses are no longer able to deduct entertainment expenses such as season tickets for local sports teams. Meals, however, are still deductible.
Business interest: The TCJA also placed new limits on the deductibility of business interest. “If you’re a business that uses lots of leverage, you should pay attention to these new rules,” Sweet said.
- Opportunity zones: Through the TCJA, Congress established opportunity zones, which according to the IRS are “economically distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment.” Search “opportunity zones” online for more information about where those zones are located and the potential tax benefits.
