The old saying that nothing is certain except death and taxes is only partly true. While you can expect to continue to pay taxes in 2018, the Internal Revenue Service has announced a number of changes to the tax laws for the upcoming year. Many changes are triggered by inflation, so many of the income limits for claiming deductions are increasing. Read on for a tax update on the changes you need to know about to plan for your financial future, and the tax breaks you can expect to get in 2018.
1. Tax Brackets Increase for All Filing Statuses
Your federal taxes are calculated based on the tax brackets for your filing status. Each year, these brackets are adjusted for inflation. Here are the income levels for the top tax brackets for each filing status in 2018:
Single: $426,700 (up from $418,400 in 2017)
Head of Household: $453,350 (up from $444,550 in 2017)
Married Filing Jointly: $480,050 (up from $470,700 in 2017)
Married Filing Separately: $240,025 (up from $235,350 in 2017)
2. Employer-Sponsored Retirement Contribution Limits Increase
The contribution limit for elective deferrals to 401k, 403(b), most 457 plans and the federal government's Thrift Savings Plan increases to $18,500 in 2018 from $18,000 in 2017. The total amount that can be contributed to a plan by you and your employer combined rises to $55,000 from $54,000. However, the amount of the catch-up contribution for taxpayers aged 50 and older remains at $6,000.
3. Traditional IRA Income Restrictions to Deduct Contributions Rise
Contribution limits for IRAs remained unchanged at $5,500 (plus $1,000 as a catch-up contribution if you are 50 or older). However, the IRS did announce a few other tax changes that impact IRAs. First, if you are covered by an employer-sponsored plan, your income limit when you'll still get a deduction for contributing increases.
Single Filers: The maximum deduction is reduced at $63,000 (up from $62,000 in 2017) and is completely eliminated at $73,000 (up from $72,000).
Joint Filers: The maximum deduction is reduced at $101,000 (up from $99,000) and is completely eliminated at $121,000 (up from $119,000).
If your spouse is covered, but you aren't, your maximum deduction is reduced at $189,000 (up from $186,000) and is completely eliminated at $199,000 (up from $196,000).
4. Income Limits to Contribute to a Roth IRA Rise
Roth IRAs offer after-tax savings for retirement, but if your income is too high for the year, you're not allowed to make a contribution.
Single filers: Your maximum contribution is reduced when your modified adjusted gross income is $120,000 (up from $118,000) and eliminated at $135,000 (up from $133,000).
Joint filers: Your maximum contribution is reduced when your modified adjusted gross income is $189,000 (up from $186,000) and eliminated at $199,000 (up from $196,000).
5. Standard Deduction Rises for All Filing Statuses
The standard deduction is a deduction that all taxpayers are entitled to unless they choose to itemize their deductions. The 2018 standard deductions for all filing statuses are as follows:
Single: $6,500 (up from $6,350 in 2017)
Head of Household: $9,550 (up from $9,350)
Married Filing Jointly: $13,000 (up from $12,700)
Married Filing Separately: $6,500 (up from $6,350)
6. Income Caps Rise Before Itemized Deduction Limitations Apply
If your adjusted gross income is too high, the amount you can claim for certain itemized deductions is limited. These itemized deductions include charitable gifts, taxes paid, interest paid, job expenses and other miscellaneous deductions (excluding gambling losses and casualty and theft losses). In 2018, the limitations start kicking in when your adjusted gross income exceeds $266,700 if you are single or $320,000 if you are married filing jointly, up from $259,400 if single and $311,300 if married filing jointly in 2017.
More on Deductions: Best and Worst Ways to Itemize Your Taxes
7. Personal Exemptions Increase
The value of a personal exemption increases from $4,050 to $4,150 in 2018. Each exemption you claim reduces your taxable income. Unless someone else claims you as a dependent, you claim yourself, your spouse (if married and filing jointly) and anyone who qualifies as your dependent. However, if you make too much money, the value of the exemption is reduced or eliminated. For 2018:
For single filers: Reduced starting at $266,700 and eliminated at $389,200
For joint filers: Reduced starting at $320,000 and eliminated at $442,500
The exemption is subject to a phase-out that begins with adjusted gross incomes of $266,700 ($320,000 for married couples filing jointly). It phases out completely at $389,200 ($442,500 for married couples filing jointly).
8. HSA Contribution Limits Go Up
Health savings accounts let you save money in a special tax-advantaged account for future medical expenses. In 2018, the amount you can stash away increases to $3,450 for self-only coverage (up from $3,400 in 2017) and $6,900 for taxpayers with family coverage (up from $6,750).
9. Estate and Gift Tax Exemptions Increase
In 2018, the federal estate tax exemption rises to $5.6 million from $5.49 million in 2017. At a 40 percent estate tax rate, that adds up to $44,000 in savings from the previous year. In addition, the gift tax annual exclusion, or the amount you can give each person before you use up some of the estate tax exemption (or owe gift taxes), rises to $15,000 from $14,000.
Related: What is the Death Tax?
10. Transportation Fringe Benefit Limit Increases
Usually, you're required to include not only any cash payments you receive from your employer but also any other benefits your employer pays on your behalf when you report your taxable income to the IRS. However, there are certain exceptions known as fringe benefits. For example, in 2018, your employer can provide you with up to $260 of transportation benefits each month, such as free parking or a public transportation pass, without it increasing your taxable income. In 2017, the limit was $255 per month.