IRS Modifies 2018 Inflation-Adjusted Amounts

The IRS has modified certain previously released inflation-adjusted amounts. Generally, these new inflation-adjusted figures apply to tax years beginning in 2018, or transactions or events occurring in calendar year 2018. The modified items include the tax rate tables, the beginning phase out on certain itemized deductions, and the beginning phase out for personal exemptions and credits.

The following changes have been made to comply with the Tax Cuts and Jobs Act of 2017:

• Tax rate tables. Section 11001(a) of the Act provided a temporary modification to the tax rate tables for tax years beginning after December 31, 2017, and before January 1, 2026. The Act changed the beginning and ending dollar amounts for the brackets and replaced the existing tax rates with seven new rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
• Tax return preparer penalties. Section 11001(b) of the Act amended Code Sec. 6695(g) to include due diligence requirements for return preparers with respect to determining eligibility requirements to file as head of household (as defined in Code Sec. 2(b)) for tax years beginning after December 31, 2017.
• Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Section 11002 of the Act amended Code Sec. 1(f)(3) to provide a permanent cost-of-living adjustment based on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Any existing items that were not reset for 2018 will be adjusted for inflation after 2017 based on the C-CPI-U. Items that were reset for 2018 will be adjusted for inflation after 2018 based on the C-CPI-U.
• Standard deduction. The standard deduction amounts under Code Sec. 63(c)(2) for 2018 are $24,000 (married filing jointly, surviving spouses), $18,000 (head of household), and $12,000 (unmarried and married filing separately). These amounts will be adjusted for inflation for tax years beginning after December 31, 2018.
• Personal exemption. The personal exemption is $0 for tax years beginning after December 31, 2017, and before January 1, 2026.
• Limitation on itemized deductions. Section 11046 of the Act amended Code Sec. 68 to provide a temporary suspension of the limitation on itemized deductions for tax years beginning after December 31, 2017, and before January 1, 2026.
• Estate and gift taxes. Section 11061 of the Act amended Code Sec. 2010(c)(3) to provide a temporary increase to $10,000,000 of the estate tax exemption, effective for estates of decedents dying after December 31, 2017, and before January 1, 2026. The $10,000,000 amount was indexed for inflation for tax years beginning after December 31, 2017.
• Alternative minimum tax. The alternative minimum tax (AMT) exemption amounts are increased to $70,300 (single, head-of-household), $54,700 (married filing separately), $109,400 (married filing jointly, surviving spouses) and $24,600 (estates, trusts). The exemption amounts phase out when alternative minimum taxable income (AMTI) exceeds $1,000,000 (married filing jointly, surviving spouses), $500,000 (single, head-of-household), $500,000 (married filing separately, estates and trusts).
• Code Sec. 179 property. Section 13101 of the Act amended Code Sec. 179(b) to provide a permanent increase of the maximum amount a taxpayer may expense under Code Sec. 179(b)(1) to $1,000,000, and of the phase out threshold amount under Code Sec. 179(b)(2) to $2,500,000. These amounts would be adjusted for inflation for tax years beginning after December 31, 2018.

The following amounts have been updated:

• Kiddie tax. For tax years beginning in 2018, for a child to whom the Code Sec. 1(g)”kiddie tax” applies, the exemption amount under Code Secs. 55 and 59(j) for alternative minimum tax purposes cannot exceed the sum of the child’s earned income for the tax year plus $7,600.
• Adoption credit. The adoption credit is $13,810. The credit begins to phase out for taxpayers with modified adjusted gross income in excess of $207,140 and is completely phased out for taxpayers with modified adjusted gross income of $247,140 or more. The amounts of adoption assistance that can be excluded from an employee’s gross income is also $13,810, with the same phase out as the adoption credit.
• Earned income tax credit. In 2018, the maximum EITC is $6,431 for taxpayers with three or more qualifying children, $5,716 for taxpayers with two qualifying children, $3,461 for taxpayers with one qualifying child, and $519 for taxpayers with no qualifying children. The credit amount begins to phase out at an income level of $18,660 ($8,490 for taxpayers with no qualifying children). The credit is not allowed if the aggregate amount of certain investment income exceeds $3,500.
• Low-income housing credit. The amount used to calculate the 2018 state housing credit ceiling for the low-income housing credit under Code Sec. 42(h)(3)(C)(ii) is the greater of $2.40 multiplied by the state population, or $2,760,000.
• Employee health insurance expense of small employers. For calendar year 2018, the dollar amount in effect under Code Sec. 45R(d)(3)(B) is $26,600.
• Savings bond education exclusion. The exclusion under Code Sec. 135 for taxpayers who pay qualified higher education expenses begins to phase out for modified adjusted gross income (MAGI) above $119,300 for joint returns and $79,550 for other returns. The exclusion phases out completely at MAGI levels of $149,300 for joint returns and $94,550 for other returns.
• Private activity bonds volume cap. The calendar-year 2018 amounts used under Code Sec. 146(d)(1) to calculate the state ceiling for the volume cap for private activity bonds is the greater of (1) $105 multiplied by the state population, or (2) $310,710,000.
• Loan limits on agricultural bonds. The 2018 loan limit amount on agricultural bonds under Code Sec. 147(c)(2)(A) for first-time farmers is $533,500.
• Medical savings accounts. For tax years beginning in 2018, the term “high deductible health plan” as defined in Code Sec. 220(c)(2)(A) means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,300 and not more than $3,450, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,500. For family coverage, the term means a health plan that has an annual deductible that is not less than $4,550 and not more than $6,850, and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,400.
• Low-cost article. For purposes of defining the term “unrelated trade or business” for certain exempt organizations under Code Sec. 513(h)(2), “low cost articles” are those costing $10.80 or less.
• Foreign earned income exclusion. The foreign earned income exclusion amount under Code Sec. 911(b)(2)(D)(i) is $103,900.
• Unified credit against estate tax. For an estate of any decedent dying in calendar year 2018, the basic exclusion amount is $11,180,000 for determining the amount of the unified credit against estate tax under Code Sec. 2010.
• Notice of large gifts from foreign persons. Code Sec. 6039F authorizes the Treasury Department and the IRS to require recipients of gifts from certain foreign persons to report the gifts when the aggregate value of gifts received in the tax year exceeds $16,076.
• Property exempt from levy. The value of property exempt from levy under Code Sec. 6334(a)(2) (fuel, provisions, furniture, other household personal effects, arms for personal use, livestock and poultry) cannot exceed $9,360. The value of property exempt from levy under Code Sec. 6334(a)(3) (books and tools necessary for the trade, business or profession of the taxpayer) cannot exceed $4,680.
• Failure-to-file penalty. If a return is not filed on time or if the tax owed by the taxpayer is not  paid on time, a penalty is imposed unless the taxpayer shows that the delay resulted from a reasonable cause rather than willful neglect. For tax years beginning in 2018, the amount of the additional tax under Code Sec. 6651(a) that is imposed for failure to file a tax return within 60 days of the due date of that return is not less than the lesser of $210 or 100 percent of the amount required to shown as tax on that return.
• Exempt organization information returns. For tax years beginning in 2018, the IRS has revised the inflation-adjusted penalty amounts under Code Sec. 6652(c) for failure to file information returns by certain trusts and exempt organizations. This includes (1) failure to file a return required under Code Sec. 6033(a)(1), relating to returns by exempt organizations, or Code Sec. 6012(a)(6), relating to returns by political organizations; (2) failure to file a return required under Code Sec. 6034, relating to returns by certain trust, or Code Sec. 6043(b), relating to terminations, etc., of exempt organizations; and (3) failure to file a disclosure required under Code Sec. 6033(a)(2). The amount of the penalty, as adjusted for inflation, depends on the type of entity and the nature of the failure to file.
• Tax return preparer penalties. For tax years beginning in 2018, the IRS has revised the inflation-adjusted amounts under Code Sec. 6695 for penalties against tax return preparers. The penalty amounts vary according to the specific type of failure involved, including failure to furnish a copy to the taxpayer, failure to sign the return, failure to furnish an identifying number, failure to retain a copy or list, or failure to file correct information returns (for all of the foregoing, $50 per return or refund claim, with a maximum penalty of $26,000). Penalty amounts are also revised for failure related to negotiation of a check, and failure to be diligent in determining eligibility for certain specified tax credits ($520 per check or return, with no maximum).
• Penalty for failure to file correct information return. The IRS has revised the inflation adjustments for certain civil penalties for returns and statements required to be filed for tax years beginning in 2018. The penalty amounts under Code Sec. 6721 for failure to file correct information returns are: (1) for persons with average gross receipts for the most recent three tax years of more than $5,000,000, the penalty is generally $270 per return (maximum $3,275,500 per year). However, it is $50 per return (maximum $545,500) per return if corrected on or before 30 days after the required filing date; $100 per return (maximum $1,637,500 per year) if corrected after the 30th day but on or before August 1; (2) for persons with average gross receipts for the most recent three tax years of $5,000,000 or less, the penalties per return are the same as above, but the annual maximum penalties decrease to $1,091,550, $191,000, and $545,500, respectively. In addition, the IRS has also revised the penalty amounts for persons whose failure to file was due to intentional disregard of the filing requirement (or the correct information reporting requirement); these penalties vary based on the type of return.
• Penalty for failure to furnish correct payee statement. For tax years beginning in 2018, the IRS has revised the inflation-adjusted penalty amounts under Code Sec. 6722 for failure to furnish correct payee statements. These include penalties for failure to furnish payee statements by (1) persons with average annual gross receipts for the most recent three tax years of more than $5,000,000; (2) persons with average annual gross receipts for the most recent three tax years of $5,000,000 or less; and (3) persons whose failure to file correct statements was due to intentional disregard of the requirement to furnish a payee statement, or the correct information reporting requirement.
• Rev. Proc. 2017-58, I.R.B. 2017-45, 489, is modified and superseded; Rev. Proc. 2017-37, I.R.B. 2017-21, 1252 is supersede.

Contact an MCB Tax Advisor at 703-218-3600 to discuss your tax planning needs and learn how these changes impact you.