Important 2018 Tax Item Adjustments
By Melanie Hou, CPA and Emily Irving
Welcome to the 2018 tax year which will prove to be a big transition as we plan and develop new tax strategies as a result of the Tax Cut and Jobs Act. As we start the new year, unrelated to the new tax bill, we want to make sure you are aware of some 2018 cost-of-living adjustments and other tax item adjustments.
Increased Contribution Amounts for Employee Deferrals
The maximum contribution limit for employee salary deferrals to 401(k), 403(b), and 457 plan accounts in 2018 has increased $500 to $18,500 for elective contributions, up from $18,000 in 2017.
In 2017, workers age 50 and over were allowed to make catch-up contributions of $6,000. This amount did not increase for 2018, so workers age 50 and over will be allowed to contribute a maximum of $24,500 in elective deferrals in 2018, compared with $24,000 in 2017.
If you wish to maximize your contribution this year, please coordinate with your HR department to increase your 2018 contribution amount to the new levels.
For those of you who are self-employed, the new 2018 defined contribution limit will be $55,000 for workers under age 50, and $61,000 for workers age 50 and over.
Increased Social Security Wage Base
The Social Security Administration (SSA) announced that the maximum earnings subject to the Social Security component of the FICA tax will increase from $127,200 to $128,700 for 2018. This means that for 2018, the maximum Social Security tax that employers and employees will each pay is $7,979.40 ($128,700 x 6.2%). A self-employed person with at least $128,700 in net self-employment earnings will pay $15,958.80 ($128,700 x 12.40%) for the Social Security portion of self-employment tax. The Medicare component remains 1.45% of all earnings, and individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly, $125,000 for married filing separately) will pay an additional 0.9% in Medicare tax.
Mileage Rate Increases
Beginning on January 1, 2018, the standard mileage rates for the use of an automobile will be:
- 54.5 cents for every mile of business travel driven, up 1 cent from the rate for 2017.
- 18 cents per mile driven for medical or moving purposes, up 1 cent from the rate for 2017.
- 14 cents per mile driven in service of charitable organizations.
Increased Nanny Tax Threshold
The Social Security Administration (SSA) has announced that for the 2018 tax year, the cash wages paid by an employer for domestic service in the employer’s private household is subject to FICA tax (often referred to as nanny tax) if the amount of wages paid during the year is more than $2,100. This is up from the 2017 wage threshold of $2,000. Note that this dollar threshold applies separately to each household employee.
Annual Gift Tax
The annual gift tax exclusion is also increasing due to inflation. After five years of being at $14,000, in 2018, the exclusion will be $15,000 per recipient. The federal gift tax exclusion applies to the gift giver and not the recipient.
The Tax Cut and Jobs Act
We will begin preparing our newsletters detailing important aspects of the Tax Cut and Jobs Act. Our selection of topics will be based on changes that we believe impact our clients the most. We will begin with our article next week explaining the changes to the home mortgage interest rules.
There are plenty of articles on the internet summarizing all aspects of the bill. The Motley Fool published a good summary. Here is the link: https://www.fool.com/taxes/2017/12/30/your-complete-guide-to-the-2018-tax-changes.aspx.
Lastly, please accept our wishes for a happy and healthy 2018!