The New Tax Law & Tips in Preparing for 2018 Tax

With your 2017 Federal and TN Tax returns filed, 2018 and beyond offer changes in both Federal and TN tax law. Here are some highlights of both tax systems and the major items that will affect many of our clients.

Tennessee Tax

While Tennessee does not have a state income tax, we do still have what is known as the “Hall Tax”. This tax is on interest, dividends, and capital gain distributions from mutual fund investments (not capital gain from sales) less a standard deduction ($1,250 for individuals and $2,500 for married couples).

It’s getting better and better every year.  In May, 2016, Gov. Bill Haslam signed into law a bill that reduced and will ultimately eliminate this tax. In 2016, the Hall tax was reduced from 6% to 5% and scheduled to phase out as follows:

2017: 4%; 2018: 3%; 2019: 2%; 2020: 1%; 2021 and beyond: 0%

Federal Tax

To really understand how the tax changes will affect you, it is important to know how your taxes are calculated. Consider your Federal tax return (IRS Form 1040), like a math problem:

Page 1 of the 1040:         Income – Adjustments = Adjusted Gross Income

Page 2 of the 1040:         Adjusted Gross Income – Itemized/Standard Deductions = Taxable Income

    1040 Page 1                      1040 Page 2


Itemized Deductions consist of adding up your medical expenses (subject to a phaseout), real estate and sales tax, mortgage interest, and charitable gifts. The NEW standard deduction is: $12,000 for single filers, $18,000 for head of household, and $24,000 for joint filers. You will take the higher of either the standard or the itemized deduction.

Note that your taxable income is progressive. Thus, your first dollars would be taxed at 10%, once you exceed the 10% threshold, the next dollars are taxed at 12%. The highest bracket you fall into is referred to as your “Marginal Tax Rate” but you still paid tax at the lower rates along the way to your top bracket.

For example, if you are filing a joint tax return and your taxable income comes to $65,000, many people think they will pay 12% tax on full $65,000 (which equals $7,800 of tax) but your tax is really calculated as follows:

Here are the tax brackets for 2018 vs. 2017:


Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
12% $9,525-$38,700 $19,050-$77,400 $13,600-$51,800 $9,525-$38,700
22% $38,700-$82,500 $77,400-$165,000 $51,800-$82,500 $38,700-$82,500
24% $82,500-$157,500 $165,000-$315,000 $82,500-$157,500 $82,500-$157,500
32% $157,500-$200,000 $315,000-$400,000 $157,500-$200,000 $157,500-$200,000
35% $200,000-$500,000 $400,000-$600,000 $200,000-$500,000 $200,000-$300,000
37% Over $500,000 Over $600,000 Over $500,000 Over $600,000


Marginal Tax Rate Single Married Filing Jointly Head of Household Married Filing Separately
10% $0-$9,525 $0-$19,050 $0-$13,600 $0-$9,525
15% $9,525-$38,700 $19,050-$77,400 $13,600-$51,850 $9,525-$38,700
25% $38,700-$93,700 $77,400-$156,150 $51,850-$133,850 $38,700-$78,075
28% $93,700-$195,450 $156,150-$237,950 $133,850-$216,700 $78,075-$118,975
33% $195,450-$424,950 $237,950-$424,950 $216,700-$424,950 $118,975-$212,475
35% $424,950-$426,700 $424,950-$480,050 $424,950-$453,350 $212,475-$240,025
39.6% Over $426,700 Over $480,050 Over $453,350 Over $240,025


Standard Deduction and Personal Exemption

The standard deduction has roughly doubled for all filers, but the valuable personal exemption has been eliminated. For example, a single filer would have been entitled to a $6,500 standard deduction and a $4,150 personal exemption in 2018, for a total of $10,650 in income exclusions. Under the new tax plan, an individual would get a $12,000 standard deduction.

Having said that, here’s a comparison between the standard deductions of the new and old tax laws.

Tax Filing Status Previous Standard Deduction New Standard Deduction
Single $6,500 $12,000
Married Filing Jointly $13,000 $24,000
Married Filing Separately $6,500 $12,000
Head of Household $9,350 $18,000


Tax Breaks for Parents

As mentioned earlier that the personal exemption is going away, which could disproportionally affect larger families.

However, this loss and more could be made up for by the expanded Child Tax Credit, which is available for qualified children under age 17. Specifically, the bill doubles the credit from $1,000 to $2,000, and also increases the amount of the credit that is refundable to $1,400.

In addition, the phaseout threshold for the credit is dramatically increasing.

Tax Filing Status Old Phaseout Threshold New Phaseout Threshold
Married Filing Jointly $110,000 $400,000
Individuals $75,000 $200,000

If your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.

Furthermore, the Child and Dependent Care credit which allows parents to deduct qualified child care expenses, has been kept in place. This can be worth as much as $1,050 for one child under 13 or $2,100 for two children. Plus, up to $5,000 of income can still be sheltered in a dependent care flexible spending account on a pre-tax basis to help make child care more affordable. You can’t use both of these breaks to cover the same child care costs, but with the annual cost of child care well over $20,000 per year for two children in many areas, it’s safe to say that many parents can take advantage of the FSA and credit, both of which remain in place.


Mortgage Interest, Charitable Contributions, and Medical Expenses

These three deductions remain, but there have been slight tweaks made to each.

  • First, the mortgage interest deduction can only be taken on mortgage debt of up to $750,000, down from $1 million currently. This only applies to mortgages taken after Dec. 15, 2017, preexisting mortgages are grandfathered in. This includes Home Equity loan interest used to improve a home or second home.
  • Next, the charitable contribution deduction is almost the same, but with two notable changes. First, taxpayers can deduct donations of as much as 60% of their income, up from a 50% cap. And donations made to a college in exchange for the right to purchase athletic tickets will no longer be deductible.
  • Finally, the threshold for the medical expenses deduction has been reduced from 10% of AGI to 7.5% of AGI. In other words, if your adjusted gross income is $50,000, you can now deduct any unreimbursed medical expenses over $3,750, not $5,000 as set by prior tax law. Unlike most other provisions in the bill, this is retroactive to the 2017 tax year.


The State and Local Tax (SALT) Deduction

Perhaps the most controversial aspect of tax reform on the individual side was the fate of the SALT deduction. Early versions of the bill proposed eliminating the deduction (which stands for “state and local taxes”), which didn’t sit well with some key Republicans in high-tax states.

The final version of the bill keeps the deduction, but limits the total deductible amount to $10,000, including income, sales, and property taxes.


Deductions That Are Disappearing

While many deductions are remaining under the new tax law, there are several that didn’t survive, in addition to those already mentioned elsewhere in this guide. Gone for the 2018 tax year are the deductions for:

  • Casualty and theft losses (except those attributable to a federally declared disaster)
  • Unreimbursed employee expenses
  • Tax preparation expenses
  • Other miscellaneous deductions previously subject to the 2% AGI cap
  • Moving expenses
  • Employer-subsidized parking and transportation reimbursement


Of course these are just some of the highlights of the tax law changes. For more information on how the law will directly impact your taxes moving forward, please don’t hesitate to call us or consult with your tax preparer!