About a year ago, Congress passed the “Tax Cuts and Jobs Act,” enacting one of the largest set of tax changes in decades. Most of these changes are now in effect for the 2018 tax year, and you will notice the differences as you file this April.
Here is a roundup of the most important things to know about the recent tax changes. As you prepare to file your taxes this season, consider your tax strategy and how these changes could affect you as an individual taxpayer. If you’re unsure about how to navigate your taxes this year, please contact us for financial planning services in Utah County and the surrounding areas.
1. Tax bracket changes
There are still seven tax brackets; however, overall rates have been lowered, and income thresholds have increased. Thus, the top tax brackets are now lower and apply to fewer taxpayers.
For example, in 2017, the top tax bracket was 39.6% for incomes of over $480,050 if married and filing jointly. Now, the top bracket has dropped to 37% and applies to those with a taxable income of over $612,000. So, high-wage earners may find themselves in a different tax bracket this year with a lower tax rate.
2. Higher standard deduction
If you itemized in 2017, rather than taking the standard deduction, there’s a good chance that will change for the 2018 tax year. The standard deduction of $12,700 for those married filing jointly in 2017 has now been increased to $24,000 for 2018. In fact, the standard deduction for any American, no matter how they file, has nearly doubled. While this change will decrease many Americans’ tax bills, the consequence is that many of these Americans will no longer get additional deductions from their charitable contributions, mortgage interest, and state and local taxes. If you regularly give to charity, ask your tax advisor about bunching your future donations to allow you to receive a tax benefit.
In the past, about 30% of taxpayers have found it more beneficial to itemize; however, it is estimated that this year, less than 10% of taxpayers will do so.
3. No more personal exemption
In past years, taxpayers could claim a personal exemption of up to $4,050 (in 2017) for themselves, their spouse, and each dependent. Starting this year, though, personal exemptions will no longer be an option. The increased standard deduction and increased child tax credit (see below) are intended to compensate for the elimination of personal exemptions.
For large families who have claimed multiple exemptions in the past, this could largely affect the amount received on a tax return. However, this loss will be compensated to some degree by the increase in the standard deduction and the doubled child tax credit.
4. Increased child tax credit
Good news for Americans with children under the age of 17: child tax credits have doubled. The previous tax credit of $1,000 per child has increased to $2,000, with $1,400 of that money being fully refundable. This increase may help make up for money lost if you were planning on claiming personal exemptions for your minor children.
In addition, the child tax credit now applies to more American families. Previously, the income limit for the full credit was $110,000; now, it is $400,000. So, you may qualify for child tax credits this go around even if you were above the income threshold in past years.
5. Other deductions have been changed or eliminated
Along with the standard deduction being increased, other deductions have been eliminated, reduced, or changed. For example, deductions for investment-advisory fees, unreimbursed employee expenses, and moving expenses are no longer an option.
Perhaps most significantly, a $10,000 limit has been placed on the amount you can deduct for state and local taxes (SALT). If you are a high-wage earner in a state with above-average tax rates, such as New York, California, or Connecticut, consider asking a tax advisor what can be done in future years to mitigate the effects of this change.
So, how will these changes affect your 2019 tax return? It’s hard to say. For most, their tax bill will be somewhat lower. However, one thing is certain: there has never been a more important time to ensure that you are working with the best financial planning company in Utah County. At True North Wealth, we help you implement tax strategies throughout the tax year to ensure that you realize the minimum tax you are legally required to pay.