More and more taxpayers are having deductions and credits either limited or completely disallowed, or additional taxes assessed, because of the level of their adjusted gross income (AGI). AGI is your income minus qualified deductions, i.e. alimony, student loan interest. Check the list below to see if you might fall into any of these limitations/additional tax situations.
Child Tax Credit: Starting in 2018, this credit can be up to $2,000 per child 16 and younger. However, the amount of the credit decreases as your income rises. For single and head of household taxpayers, the credit begins to decrease at $200,000 AGI. It decreases at $400,000 AGI for married filers.
AMT: To prevent higher-income taxpayers from claiming too many deductions, Congress created the Alternative Minimum Tax (AMT) in 1969.
You may have to pay the AMT if your taxable income, plus any adjustments and special items that may apply to you, are more than the AMT exemption amount. Starting with the 2018 tax year, taxpayers get the following amounts as exemptions from AMT:
• $109,400 for a married couple filing a joint return and qualifying widows and widowers
• $70,300 for singles and heads of household
• $54,700 for a married person filing separately
This AMT exemption will be indexed for inflation in the future.
IRA Contributions: The contribution limit to your traditional or Roth IRA has increased to the smaller of $5,500 or your taxable compensation for the year. If you were age 50 or older, the most that can be contributed to your traditional or Roth IRA is the smaller of $6,500 or your taxable compensation for the year.
Roth IRA contributions are reduced/phased out if your modified AGI is between $120,000 to $134,999 for singles and $189,000 to $198,999 for couples.
You may make your full traditional IRA contribution if you (and spouse) are not covered by an employer retirement plan. If you are covered by a retirement plan at work, your deduction to a traditional IRA is phased out if you modified AGI is between $63,000 to $73,000 for singles and $101,000 to $121,000 for couples. If only one spouse is covered by a plan at work, the phaseout zone for deducting a contribution for the uncovered spouse begins at $189,000 of AGI and finishes at $199,000. When your AGI goes above the upper limit of the phaseout range, your Roth IRA deduction is not allowed, and your traditional IRA deduction is not allowed.
Mortgage Interest: For any mortgages taken out after December 14, 2017, only interest on the first $750,000 of debt to purchase a house is deductible (note that mortgages taken out prior to that date are grandfathered in under the old rules/still subject to the $1.1 million threshold). Furthermore, interest on home equity loans where the proceeds are used for expenses other than home improvement/related will no longer be deductible after 2017. Note that interest on home equity loans where proceeds ARE used for home improvement are still deductible, subject to the aggregate $750,000 limitation referred to above.
Rental Losses: Owning a rental property is a great investment, but it might not have all the advantages you are hoping for if your AGI is more than $100,000. If your rental has a loss, the deduction is reduced as your AGI rises above $100,000. If your AGI is more than $150,000, your loss is totally suspended and you get no tax benefits that year. However, unused losses will be carried forward to future years and used when a profit or sale of property occurs.
Medical Deductions: For 2018, taxpayers cannot begin to deduct medical expenses until they exceed 7.5% of AGI. Prior to the Tax Cuts and Jobs Act, medical expenses needed to exceed 10% of AGI (7.5% if either you or your spouse is age 65 or older) to start being deducted, and after 2018 the floor will return to 10%. That means the higher your income, the less likely you will be to qualify to deduct any of these expenses unless you have very high medical costs. For example, for 2018, if you make $100,000 a year and paid $7,501 in medical expenses, you would be able to deduct only $1.
Education Credits: Education credits include the American Opportunity Credit, which covers up to $2,500 of undergraduate costs, and the Lifetime Learning Credit, which covers up to $2,000 of undergraduate and graduate school costs. Note, even if you qualify for both credits, you will only be allowed to claim one in the same taxable year.
For the American Opportunity Credit, the credit begins to phase out at $80,000 to $90,000 for single filers or $160,000 to $180,000 for married couples filing jointly.
For the Lifetime Learning Credit, the range at which the credit begins to decrease is $56,000 to $66,000 for single filers and $112,000 to $132,000 for married couples filing jointly. Taxpayers are not eligible for either credit if married filing separately. When parents have a high AGI, it’s sometimes better for children to claim themselves. Consult your tax preparer to crunch the numbers.
AMERICAN OPPORTUNITY CREDIT
LIFETIME LEARNING CREDIT
$80,000 – $90,000
$56,000 – $66,000
MARRIED FILING JOINTLY
$160,000 – $180,000
$112,000 – $132,000
Net Investment Income Tax: Taxpayers who also have investment income (interest, dividends, certain annuities, royalties, and rents) and have modified AGI over certain thresholds are also subject to a 3.8% tax on that investment income. Single and head of household taxpayers with modified AGI over $200,000 ($250,000 for couples filing jointly) will owe this tax. The tax is 3.8% on the lesser of total net investment income and the excess of modified AGI over the above thresholds.
There’s never been a better year to do some tax planning. Feel free to reach out if you want some help.