In late December 2017, the Tax Cuts and Jobs Act was enacted. The most significant change for everyone is that the tax brackets have all been lowered; the highest tax rate has decreased from 39.6% to 37%. Some other significant changes for everyone, are that the standard deduction has been raised to $12,000 and $24,000 for singles and married couples, respectively. This is somewhat offset by the personal exemption being eliminated, which is in turn offset by increasing the child tax credit from $1,000 per child to $2,000.
So, what does this mean for you?
With the decrease in tax brackets, those people who used to be in 15 to 25% tax bracket, will be in the 12 to 22% tax bracket. So, for many who only claimed a standard deduction in the past, they will most likely see their taxes decreasing. This increase in the standard deduction will mean that more taxpayers will be able to claim the standard deduction, rather than itemizing their deductions.
Here’s why. The aggregate of all state, local and property taxes is limited to $10,000. In high-tax states, such as California, many people will be subject to this limitation. So, if your status is married filing joint, unless your other deductions such as mortgage interest and charitable deductions exceed $14,000, you won’t be able to itemize. But what about miscellaneous deductions such as unreimbursed employee business expenses, investment expenses and even tax preparation? These have all been eliminated with the new tax law.
Elimination of the personal exemption
Another important elimination is the personal exemption. In 2017, every person in the household was entitled to a $4,050 exemption ( subject to certain phaseouts based on income). These have been eliminated under the new tax law. So, in effect, the old standard deduction and personal exemption have been replaced by 2018’s new higher standard deduction. Although this is a significant deduction loss for families, the increase in the child tax credit has increased from $1,000 to $2,000
On the income side, not much has changed. There have been few changes to investment income, business income, rental income, retirement income, as well as the adjustments to income, such as retirement plan deductions and self-employed health insurance.
Will you owe more or less taxes? Now is the time to review.
So, with rates going down (which have caused withholding rates to decrease accordingly), standard deduction going up, but itemized deductions being eliminated or limited, will you owe more or less in taxes? This is not an easy answer, as there are so many moving parts.
If you have concerns about this, we encourage you to contact us, and we can prepare a tax planner so that you can have a better understanding of how much your tax liability will be, as well as make sure you have appropriate withholding. If your situation results in a higher tax liability, but your withholding has decreased, this could potentially put you in a position of owing underpayment penalties when you file your tax return in early 2019, so you’ll want to consider increasing your withholding or perhaps making estimated tax payments.
You can also check out the IRS withholding calculator to ensure that your withholding is appropriate.
As always, if you have any questions regarding how the new tax law affects you, please contact us, and we can assist you.
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