Usually by late January we’re busy marshaling our documents to prepare last year’s taxes. While this still must be done, our focus is on your 2018 taxes as the legislation signed in late December will have profound effects on most of us. Here we’ll cover the highlights on how your finances will change this year with the new tax law.
Your taxes have probably gone down. A significant majority of taxpayers will see their taxes decrease for 2018. If you’re an employee, you’ll start noticing this in your paycheck as the tax withholding tables have changed to reflect the new tax law. The reasoning behind this is straightforward.
First, the income tax brackets have shifted to lower tax rates. Those who were in the 15 percent tax bracket are mostly in a new 12 percent tax bracket, with a taxable income of $19,050 to $77,400 ($9,525 to $38,700 for single filers). There’s a new 24 percent bracket that in 2017 was mostly taxed at 28 and 33 percent.
Second, the standard deduction for 2018 has increased to $24,000 (married filing jointly) and $12,000 (single) from $12,700 and $6,350 respectively last year. While personal exemptions were eliminated, most taxpayers will see a decrease in taxable income this year even if their earned income remains steady.
You probably will not be itemizing your taxes. Fewer people will be itemizing their taxes, which means filing Schedule A and listing out charitable contributions, state income and property taxes, and mortgage interest. The IRS reported that 30 percent of taxpayers itemized their taxes, with over 80 percent of those with incomes over $100,000 itemizing in 2015. The number will drop dramatically due to the higher standard deduction mentioned above, which taxpayers can elect instead of itemized deductions. Plus there’s now a limit of $10,000 for state income and property taxes that can be taken as an itemized deduction.
This change will result in a much simpler tax return for many of us. It also will change the incentives for purchasing an expensive primary residence (and a non-rental vacation home) with limits on property tax deductions and cap of $750,000 in personal mortgage debt being deductible for new loans. Charitable contributions are only deductible for those who itemize, so it may make sense to “bunch” your deductions using a donor advised fund allowing you to get credit for pre-funding your charitable contributions.
More generous child tax credit. With children under 17 in the house, you will qualify for a $2,000 tax credit (which directly reduces your tax bill) per qualifying child. Only those who are upper income with an AGI of $400,000 ($200,000 for single filers) or more, will see this credit decreased or eliminated. The credit for 2017 was reduced starting at $110,000 and $75,000 AGI respectively, so this represents a massive change. Plus, those with kids in private elementary and secondary school can now use up to $10,000 per child from their 529 accounts to pay for tuition. Those accounts were previously dedicated for post-secondary education costs only.
Business taxes have become markedly more difficult, even if you’re just a contractor. Most small businesses including solo shops will pay lower taxes given the new Qualified Business Income deduction, which can reduce your taxable business income by up to 20 percent. This is not an itemized deduction, so it can be taken in concert with the standard deduction on your personal taxes. It can benefit those who are filing Schedule C as a sole proprietor, or are receiving income from a partnership or a S-corporation. There are many caveats and trap doors with this deduction, so professional tax advice in this area becomes more important.
For years to come there will be surprises. Those who actually scrutinize their return after their tax preparer or software is done with it will find surprises as many deductions have disappeared. Among the examples, home equity line of credit interest is no longer deductible even for existing loans unless the proceeds were used to improve your property. Moving expenses can’t be deducted for your personal taxes. Personal tax prep and financial advisory fees are no longer deductible. Neither are casualty and theft losses unless you’re in a federal disaster area. Finally, unreimbursed employee business expenses are gone as a deduction, as are business entertainment expenses.