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This is an especially tricky tax season. Many tax-law changes Congress enacted in 2017 are now showing up on 2018 income tax returns. So it’s only natural that many taxpayers are confused. Next Avenue asked our readers to send us their questions. Then we asked three tax experts to answer the most common ones we heard.
The questions fell into four broad categories: Who needs to file a 2018 federal income tax return; the standard deduction versus itemized deductions; what’s tax deductible and filing a 2018 tax return late or getting an extension. The experts: Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting; Mark Steber, chief tax officer at the Jackson Hewitt tax preparation firm and Lisa Greene-Lewis, TurboTax CPA and tax expert.
Who Needs to File a 2018 Federal Income Tax Return?
“The minimum filing requirement — the income threshold — for a single taxpayer is $12,000,” says Steber. “It’s $24,000 for married couples filing jointly and $18,000 for head of household taxpayers who are single with dependents.”
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Two exceptions: If you had $400 or more in self-employment earnings last year, you need to file. And, says Greene-Lewis, if you were unmarried and 65 or older last year, you need to file a return if your gross income was $13,600 or more. (If you live just on Social Security income, that income isn’t taxable and you don’t need to file a return, she notes.)
That said, Greene-Lewis notes, if you earned income below the thresholds, even though you don’t have to file a tax return, you should. “You could have a refund coming. Especially if you had federal taxes withheld and can qualify for a refundable tax credit like the Earned Income Tax Credit, worth up to $6,431 for a family with three kids,” she says.
Standard Deduction Versus Itemized Deductions
Many readers wondered if they have a choice between itemizing deductions or taking the standard deduction, given the new rules. For 2018, the standard deduction is $12,000 for single taxpayers, $18,000 for head of household taxpayers and $24,000 for a married couple filing jointly or qualifying widows.
If you were 65 or older, the standard deduction is $13,600 for singles; $25,300 if you’re married filing jointly and one of you was 65 or older and $26,600 for married couples over 65 filing jointly.
Luscombe expects that because of the tax-law change, up to 90% of taxpayers will file the standard deduction on their 2018 returns.
“If you don’t have enough deductions to exceed the standard deduction, you will pay more in federal taxes by choosing to use the lower itemized deductions amount,” says Steber.
Greene-Lewis says homeowners who previously may have been able to itemize certain deductions may now benefit more from taking the standard deduction if it’s more than their itemized deductions. TurboTax has a free Standard vs. Itemized Tax Deduction Interactive online tool to let you know which way is best.
One reader asked: “Can I just bottom-line it by saying, ‘If I don’t have $24,000 in itemized deductions (married and filing joint), I should not itemize and just go take the standard deduction?” Steber’s response: “This is a good rule of thumb.”
Is It Tax-Deductible?
Next Avenue readers wondered whether they could write off a variety of expenses on their 2018 tax return. Here are the lightning round answers:
Which itemized deductions are still available?
The following, notes Luscombe: Mortgage interest, subject to new limits; state and local income and sales taxes and property taxes, subject to a $10,000 limit for singles and couples filing jointly; medical expenses exceeding 7.5% of your adjusted gross income if you itemize (down from 10%); charitable contributions; casualty losses for federally declared disaster areas and miscellaneous itemized deductions not subject to the 2% of adjusted gross income floor.
Interest paid on a home equity credit line is still tax-deductible if the money was used to buy, build or improve your home. But not if you used the money for other purposes, like paying off credit card debt, says Greene-Lewis. And, Steber notes, student loan interest of up to $2,500 is still tax-deductible.
Can you claim adult children as dependents?
“While you can no longer claim a tax deduction for dependents, there are tax benefits of claiming the new $500 dependent tax credit,” says Steber. For a child over 18 (over 23 if a student) to be an eligible dependent, he or she must have lived with you for at least half the year; you must have provided more than half his or her support; the child’s taxable income must have been less than $4,150 and he or she can’t file a tax return with a spouse.
The tax law also introduced a $500 tax credit for non-child dependents, which could include elderly parents, says Greene-Lewis.
Child tax credit?
“If you had children under 17 by the end of 2018, you may be able to get a tax credit of up to $2,000 per child — this number has doubled from last year,” says Greene-Lewis. “So three qualifying children can cut what you owe by $6,000.”
The income eligibility to claim the credit rose, too. It’s a maximum of $200,000 for singles and $400,000 for couples filing jointly. “So you may be eligible for the tax credit when your income took you out of the running before,” says Greene-Lewis.
Claiming a foster child?
“A foster child is eligible to be claimed as a qualifying child or a qualifying relative if the child is placed with the taxpayer by an authorized placement agency or by a decree issued by the courts,” says Luscombe. This will let you claim credits like the Earned Income Tax Credit and the Child Tax Credit, says Greene-Lewis.
Can you deduct expenses for a personal business — like a home office or a car?
“If you were a self-employed contractor, freelancer or even ran a gig such as an Uber or Lyft driver, a reseller on Etsy or Letgo or other such income, you can deduct expenses that were applied towards the income you earned,” says Steber. “This includes the office area in your home, either the standard mileage rate or actual expense of using your vehicle in the business, office expenses, business expenses, equipment for the business and advertising expenses.”
The deduction for these expenses is on Form 1040, Schedule C.
Also, Steber notes, there is a new deduction for qualified business income that lets you deduct 20% of your qualified net profit from your taxable income. Your income must have been under $157,500; under $315,000 if you are married filing jointly. Above those thresholds, your 20% deduction may be limited if your business was a service business, notes Greene-Lewis.
But if you were an employee, says Luscombe, the new tax law eliminated the miscellaneous itemized deductions category. That includes unreimbursed work-related expenses such as a home office.
“In tax year 2017, workers moving for a new job could deduct related expenses on their tax returns. Everyone, except members of the armed forces, has lost that benefit” [for 2018 returns], notes Greene-Lewis.
For 2018, the spouse paying alimony can deduct alimony payments and the recipient includes them as part of his or her taxable income. That will be reversed for divorces in 2019 and beyond, when alimony paid won’t be deductible and alimony recipients won’t owe taxes on the money.
Which tax credits are available for new hybrid cars purchased in 2018?
“The plug-in electric hybrid vehicle credit is still available, up to $7,500,” says Luscombe. But the credit for Teslas started phasing down in January 2019 and the one for GM vehicles starts phasing down in April.
Legal fees related to a father’s estate?
They’re deductible on the estate return for your father’s estate, says Steber.
Late Filing, Late Payment and Extensions
Maybe you won’t be able to file your 2018 tax return on time or pay your taxes on time. Then what?
“The federal tax return filing deadline for tax year 2018 is Monday, April 15, 2019,” says Greene-Lewis. “If you miss the deadline and do not file for an extension, it’s very important to file your taxes as soon as possible.”
Keep in mind: an extension of time to file your return doesn’t mean an extension of time to pay your taxes. Greene-Lewis advises: “If you expect to owe money, you’re required to estimate the amount due and pay it with your Form 4868.” You can ask the IRS for an installment agreement to pay your tax debt over six years.
Here’s the reason to pay your taxes on time: “A penalty of 5% of the unpaid taxes is assessed each month until you file your tax return if you don’t get an extension by April 15 or you don’t file the extended return by October 15,” says Steber. “You must pay your taxes by April 15 or be subject to the 0.5% penalty. Interest on any balance you owe is compounded daily.”
Filing an extension automatically pushes back the tax-filing deadline and protects you from possible late-filing penalties, notes Greene-Lewis. If you owe $2,500 and are three months late, the late-filing penalty would be $375. Pay more than 60 days late and the minimum penalty is $100 or 100% of the tax due with the return, whichever is less.
To file an extension form yourself at no cost, Luscombe notes, go to IRS.gov, download the form and mail it or transmit the form electronically y using one of the companies offering free filing services through the IRS’ Free File option.