Thursday, January 3, 2019

Time to get ready for your 2018 income tax return

The New Year, a Time for Reflection, Renewal and Income Tax

As we begin 2019, I wish everyone a very Happy and Prosperous New Year.  For many people, this is a time for remembrance and reflection on the past year as well as a time to make resolutions for the coming year.  I think I heard that the vast majority of new year's resolutions are broken within the first three weeks of January.  None the less, focusing on the future is more important as the future is the only time period we can change.

This brings me to the need to look forward to the filing of everyone's income tax returns.  Over the past few weeks, I have received numerous calls from clients wondering what will happen with the new tax law.  Most commonly, people want to know if they still need to keep track of and accumulate their itemized deductions.  Most people are saying that they have heard from friends or on the news that nothing is deductible any more and that they will not need to or be able to itemize any deductions.  While some people will certainly find that they will no longer want to itemize deductions for Federal income tax purposes, this is not necessarily true for everyone.  Furthermore, it may not be advisable for state income tax purposes.

Under the Tax Cuts and Jobs Act (TCJA) the standard deduction has been increased significantly.  The amount depends on the filing status of the taxpayer.  These new amounts are as follows:  $12,000 for single tax payers; $18,000 for head of household; and, $24,000 for married filing jointly.  There is and additional amount for each taxpayer on a return who has reached the age of 65, this amount is $1,600 for a single or head of household and $1,300 for each taxpayer who is at least 65 on a joint return.  On important thing to note is that the individual exemption amount from prior years has been eliminated.  Thus, the amount of taxable income is not impacted by the size of the family or number of dependents.  This does not mean that taxpayers lose all tax breaks related to their children, as there are still several tax credits available to families with qualifying children.

I mentioned above that some taxpayers will no longer want to itemize deductions for Federal income tax purposes.  However, they may still receive a more significant benefit from claiming thew standard deduction of the Federal return while itemizing deductions on the state return.  I do not have the space to outline the usefulness of itemizing deductions for all of the states that impose income taxes on individuals, I will briefly discuss the situation in Arizona, since this is the location of my practice and of the overwhelming majority of my clients. 

There continues to be a number of differences between Arizona tax laws and Federal tax laws related to individual income taxes.  I am anticipating this affecting even more taxpayers filing their 2018 tax returns than in the past.  This is primarily due to the Federal changes to the standard deduction.  As mentioned above, the TCJA significantly increased the amount of the standard deduction for Federal income tax purposes, the State of Arizona has not changed the standard deduction for Arizona income tax purposes.  In order to take advantage of the Arizona itemized deductions when the taxpayer uses the Federal standard deduction, they will need to prepare a Federal Schedule A, Itemized Deductions for 2018 and attach it to their Arizona return.  This will then be used to prepare the Arizona Schedule A by adjusting the various itemized deductions from the Federal basis to the Arizona basis.  The most notable of these is the additional medical expenses that were excluded from the Federal return by the 7.5% medical expense exclusion.  As a result, many Arizona taxpayers should be able to itemized deductions on their state returns while using the standard deduction for Federal tax purposes.

This brings me to the final item I want to mention relative to Arizona individual income taxes.  This relates to Arizona's provisions that allow taxpayers to make certain charitable contributions and claim a dollar for dollar tax credit against their Arizona income taxes.  These donations are used to offset a taxpayer's state income taxes.  It is possible for an individual to reduce their state income taxes to zero through the use of these tax credits.  These credits are generally classified in two different categories, which are then further divided.  

The first relates to donations to qualified charitable organizations.  These are broken down into two different types of credits for different types of organizations.  The type of organization of dollar limit for single and married filing joint returns are as follows:

     Organizations supporting the working poor         $400/$800
     Qualified Foster Care Organizations                    $500/$1,000

Please be aware that for 2018, taxpayers will be required to provide not only the information about the organization but also the assigned Qualified Charitable Organization Number or Qualified Foster Care Agency Number for each agency.  

The second type of credit relates to educational donations and are summarized below:

     Public School Donation or Fee Payments                                     $200/400
     Donations to Private School Tuition Organizations                      $555/$1,110
     Additional Donations to Private School Tuition Organizations    $552/$1,103

If you did not make donations to these organizations by December 31, 2018 don't worry.  The state allows taxpayers to make these donations on or before April 15, 2019 and still claim the credit for 2018.  It should be noted that while these donations are still eligible for the Arizona state income tax credits, the IRS has proposed regulations which preclude taxpayers from claiming a Federal charitable contribution deduction for donations that have been used to reduce state income taxes.  These regulations have still not been finalized and may change in the future.  However, until changed, they are still the rules to be followed.

Should you have any questions about this information, please feel free to contact me or any other qualified tax professional.  

The information contained herein is only a summary of some of the information discussed.  It is not intended to be used in an official capacity.  Income tax consequences and results may vary significantly from the information contained herein.  You should consult with your tax professional prior to taking any actions based on the information contained herein.  No responsibility or liability for adverse outcomes resulting from the interpretation of this information shall be accepted by the author.

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