Tax season – that period between January and April 15th, when most people file their taxes – is often a hectic time. But this year’s tax season is special.
It’s been a little over a year since the Tax Cuts and Jobs Act went into effect. As the largest overhaul of the tax code since 1986, the still-relatively-new law could have a major impact on your taxes, including your refund. For that reason, it might be a good idea to review these changes, as well as what you can do to minimize headaches as you file your taxes ahead of the April 15th deadline.
The most obvious major change to remember is that most tax rates have been reduced. That means there’s a pretty good chance you paid less in taxes over the past year., but that doesn’t apply universally! When we run the numbers based on the new tax law, we have noticed that a good number of our clients will actually be paying MORE in taxes, not less.
That’s why, if you receive a regular paycheck, you should pay special attention to your federal income tax withholding. This is the amount of federal income tax withheld from your paycheck, and, because of the new tax brackets, most people started seeing withholding changes around February or March of last year. And while it’s likely that less of your paycheck went to federal income taxes, you should still scrutinize your withholding carefully to make sure it’s correct. The last thing you want is to find that not enough tax was withheld by your employer! That could require you not only to have pay the IRS, but, because you did not withhold enough during the year, you also run the risk of having to pay a penalty when you file your return.
Ensuring the accuracy of your withholding is always important, of course, but because of all the changes to the tax code, it’s more critical than ever that you be thorough!
When it comes to deductions and ways to reduce your taxable income, there are two basic kinds– standard and itemized. The standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. And, the new tax law nearly doubled standard deductions, and that’s primarily because Congress did away with all personal exemptions! So, it really is important to understand how these changes can affect you.
Here’s what the new standard deduction looks like:
|Single||$12,000||Up from $6,350 in 2017|
|Married, filing jointly||$24,000||Up from $12,700 in 2017|
|Married, filing separately||$12,000||Up from $6,350 in 2017|
|Head of household||$18,000||Up from $9,350 in 2017|
But all this comes with a catch: You can’t take the standard deduction if you also itemize deductions. And for married couples who choose to file separately, both spouses must take the same type of deduction. So, if one spouse chooses to itemize, the other spouse must as well.
So, here’s what you will need to determine: Will you enjoy a larger tax cut by taking the standard deduction, or by itemizing?
For most people, the standard
deduction is probably the way to go. But if you still choose to take itemized
deductions, there are changes to those you need to be aware of as well. For
Medical expenses: For your 2018 taxes, you can deduct out-of-pocket medical and dental expenses that exceed 7.5% of your “adjusted gross income”. This is down from the previous 10%.
State and local taxes: One of the biggest changes to itemized deductions is that you can now deduct no more than $10,000 of any combination of state and local income taxes, sales taxes, and property taxes. For people living in high-tax states, this is perhaps the single biggest reason why it now makes more sense to take the standard deduction.
Mortgage interest: If you took out a mortgage or home equity loan before December 15, 2017, you can deduct up to $1,000,000 in interest. However, the new tax law caps the deduction at
$750,000 for loans taken out after that date.
Charitable contributions: The limit on charitable contributions in cash is now 60% of your adjusted gross income, up from 50% before the new tax law. That means you may be able to deduct more of any charitable cash contributions you made in 2018, but only if you itemize.
One big adjustment has to do with the Child Tax Credit. For families with children under the age of 17 it has become a bit easier to qualify for a larger child tax credit. For your 2018 return, the maximum credit is now $2,000 per child for individuals earning up to $200,000 and married couples earning up to $400,000, so long as they file jointly.
Another major change to this tax season is that fewer people now pay the Alternative Minimum Tax, or AMT. Long considered one of the most complex aspects of the tax code, the AMT was originally designed to prevent using a dizzying array of credits, deductions, and loopholes to avoid taxes altogether. Over the decades, however, the AMT began hitting those who were already paying a host of other taxes.
What can help with the stress of filing?
And remember . . . we work with our clients on strategies that will help them achieve “Tax Avoidance” . . . not “Tax Evasion” . . . the difference? About ten years in prison!
Good luck and, as always, let us know if there’s anything we can do to help.