The votes are in, and we have a new tax system. The sweeping $1.5 trillion 2018 tax reform spearheaded by the Trump Administration changed taxes dramatically for the first time in three decades.
The aim of the Tax Cuts and Jobs Act is to provide individuals and families of various income levels “broad tax relief.” In some respects, relief has arrived, according to financial advisor Jack Teboda, president and founder of Teboda & Associates.
Says Teboda, “Standard deductions have increased for single and joint filers, which means lower taxable income. Filing taxes should also be simpler now because there’s an elimination of many itemized deductions.”
The new tax bill reduces taxes for every income level. However, the higher your household income, the better your tax reduction. According to the Tax Policy Center, the largest tax cuts go to the highest income taxpayers.
If you’re a middle-income taxpayer, you can expect to pay about $900 less than in prior years, which is about 1.6% of your after-tax income. Lower-income taxpayers will see even less of a tax cut.
These changes in deductions will be reflected on February 2018 paychecks. They’ll go into effect once the IRS releases new tax tables Notice that in 2026, these new rates revert to 2017 rates. However cuts to corporate taxes are permanent.
Tax deduction increases = more money in your pocket
Standard deductions are increasing substantially in 2018—most doubling. Here are deductions by filing status. Keep in mind that you won’t get these deductions until you file your taxes in 2019.
- Married filing jointly:$24,000
- Head of household:$18,000
- Married filing separately: $12,000
How the 2018 tax reform could affect you
Of course, everyone’s tax situation is different. Families earning the same dollar amount could owe different amounts on their income taxes, depending on certain factors such as where they live.
In general, the more you earn, the higher your tax cut will be. Those with children will benefit more under the new tax bill than those without children.
To give you an idea of how your taxes could be affected, below are sample tax scenarios calculated by Teboda (note: these are estimates).
6 important 2018 tax reform changes
The 2018 tax reform bill is complicated as it features many changes. Here are six more significant differences that may alter your tax situation.
1) Affordable Care Act tax repealed
The Affordable Care Act tax on those without health insurance will no longer be in effect in 2019.
This is good news for those who haven’t had health insurance and are paying the tax penalty. But it’s bad news for anyone with an individual health plan.
The Congressional Budget Office estimates that 4 million less people will have health insurance by 2019. This could lead to higher health insurance premiums and healthcare costs. Insurance premiums are estimated to rise 10% each year.
On the other hand, according to Teboda, if you make more than $200,000 per year solo or $250,000 per year together, the repeal of “Obamacare” Medicare taxes is a good thing. The prior tax law caused high-earning individuals to pay additional taxes.
2) Personal exemptions eliminated
Prior tax law allowed taxpayers to subtract $4,150 from their income as a personal exemption. This is no longer an option. That means that families with many children may pay higher taxes, even though there are increased standard deductions.
3) Child tax credit increased
The 2018 tax reform increased the Child Tax Credit from $1,000 to $2,000. If you’re a parent who doesn’t earn enough to pay taxes, you can still claim the credit up to $1,400.
The income level at which point the tax credit phases out has been raised from $110,000 to $400,000 for married tax filers. If you’re caring for an elderly parent, you can get a $500 credit for each non-child dependent.
4) Most itemized deductions eliminated
Not having to list deductions on your tax return can simplify filing your taxes. However, it also means that you can’t deduct expenses you once were able to deduct—like moving costs (unless you’re military) or paying alimony.
Says Teboda about this change, “If you’ve claimed itemized deductions in the past, this change could be reflected on your tax return.”
Deductions for charitable contributions, retirement savings, and student loan interest remain in effect.
5) Mortgage interest deduction reduced
Buying a new home doesn’t offer the tax savings it once did. The 2018 tax reform limits the deduction of mortgage interest to the first $750,000 of a loan. Current mortgage holders aren’t affected by this, though.
A home equity line of credit interest is also no longer tax deductible.
6) Medical expense deductions expanded
You’re now able to deduct medical expenses that equal 7.5% or more of your gross income. Prior to the new tax bill, the cut-off was 10% of gross income for those born after 1952 and 7.5% for seniors. The new deduction is intended to help individuals with chronic medical conditions that can lead to medical debt.
If you want to plan ahead (and you should), first find out how the new tax laws will affect you. To do so, find a tax preparation firm that best suits you and your situation.
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