IRS modifies 2018 inflation adjustment 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 phaseout on certain itemized deductions, and the beginning phaseout for personal exemptions and credits.
The following changes have been made to comply with the Tax Cuts and Jobs Act of 2017 (P.L. 115-97):

  • Tax Rate Table. 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.
  • Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Section 11002 of the Act amended Code Sec. 1f(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 amends 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.

The following amounts are updated:

  • 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 phaseout 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.
  • 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.
  • 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.
  • Foreign earned income exclusion. The foreign earned income exclusion amount under Code Sec. 911(b)(2)(D)(i) is $103,900.
  • Failure-to-file penalty. If a return is not timely filed or if the tax owed by the taxpayer is not timely paid, 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.
  • Penalty for failure to file information returns. For tax years beginning in 2018, the IRS has provided 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 amounts under Code Sec. 6695 for penalties for tax return preparers, as adjusted for inflation, have been provided by the IRS. 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 provided 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 provided inflation adjustments for certain civil penalties for returns and statements required to be filed in 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 of more than $5,000,000, the penalty for failure to file correct payee statements is generally $270 (maximum $3,275,500). However, it is $50 (maximum $545,500) per return if corrected on or before 30 days after the required filing date; $100 (maximum $1,637,500) if corrected after the 30th day but on or before August 1; (2) for persons with average gross receipts of $5,000,000 or less, the penalties per return are the same but the maximum penalty decreases to $1,091,5500; $191,000 and $545,500 respectively. In addition, the IRS has provided the amount of penalties for persons whose failure to file was due to intentional disregard of the filing requirement (or the correct information reporting requirement), which vary depending on which return was required to be filed.
  • Penalty for failure to furnish correct payee statement. For tax years beginning in 2018, the inflation-adjusted penalty amounts under Code Sec. 6722 for failure to furnish correct payee statements are provided by the IRS. This includes 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. 2018-18, I.R.B. 2018-10, 392, March 5, 2018; 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 superseded.)

Visit our News Library to read more news stories.