With the passage of the Tax Cuts and Jobs Act, preparing your 2018 taxes is not business as usual. There are many changes to the tax laws this year that you need to know about. Remember that taxes are due Monday, April 15th this year. Although that date may seem far away, you need to start preparing now for the tax deadlines so that you’re not rushing at the last minute.
This tax guide will help you maximize savings when filing your tax return. If you can’t afford to pay the taxes you owe, the IRS has tax relief programs that can help. Find out which tax relief program you qualify here.
Major tax law changes for 2018
Whether you are filing taxes for your family or your business, there are major tax law changes you need to be aware of.
- Income tax rates decreased across the board.
- Personal Exemption deductions are eliminated.
- Standard Deduction amount has nearly doubled for all filers.
- Child Tax Credit has doubled.
- Mortgage Interest Deduction reduced to $750,000 for new homebuyers.
- State and Local Taxes (SALT) deductions are capped at $10,000.
Income Tax Rates Reduced
Income tax rates declined for six tax bracket. The lowest tax rate remains at 10%, but the top tax rate decreased from 39.6% to 37%. The amount of income subject to each tax bracket changed as well.
|2017 Taxable Income||2017 Tax Rates||2018 Taxable Income||2018 Tax Rate|
|$0 – $9,325||10%||$0 – $9,525||10% of taxable income|
|$9,326 – $37,950||$932.50 plus 15% of the amount over $9,325||$9,526 – $38,700||$952.50 plus 12% of the amount over $9,525|
|$37,951 – $91,900||$5,226.25 plus 25% of the amount over $37,950||$38,701 – $82,500||$4,453.50 plus 22% of the amount over $38,700|
|$91,901 – $191,650||$18,713.75 plus 28% of the amount over $91,900||$82,501 – $157,500||$14,089.50 plus 24% of the amount over $82,500|
|$191,651 – $416,700||$46,643.75 plus 33% of the amount over $191,650||$157,501 – $200,000||$32,089.50 plus 32% of the amount over $157,500|
|$416,701 – $418,400||$120,910.25 plus 35% of the amount over $416,700||$200,001 – $500,000||$45,689.50 plus 35% of the amount over $200,000|
|$418,401 or more||$121,505.25 plus 39.6% of the amount over $418,400||$500,001 or more||$150,689.50 plus 37% of the amount over $500,000|
A single person with $50,000 in taxable income will pay $6,940 in federal income taxes in 2018, a reduction of $1,299 compared to 2017 tax rates. With $100,000 in taxable income, a single person would pay $18,290 in federal income taxes, a reduction of $2,692 versus 2017.
Personal Exemption Deduction Eliminated
In 2017, the Personal Exemption Deduction allowed taxpayers to deduct $4,050 per person. In most households, the number of personal exemptions claimed is equal to the number of dependent family members. For a family of four, the Personal Exemption reduced taxable income by $16,200.
Last year, the Personal Exemption Deduction began to phase out at $261,500 for individuals and $313,800 for married filing jointly. Now it is completely gone. The elimination of this deduction is partially offset by the increase in the Standard Deduction.
Standard Deduction Increased
The Standard Deduction nearly doubled for all tax filers. Single taxpayers benefit from the Standard Deduction increase from $6,350 to $12,000 in 2018. The Standard Deduction for Married Filing Jointly increased from $12,700 to $24,000.
|Standard Deduction by Filing Status||Tax Year 2017||Tax Year 2018||Increase|
|Married Filing Jointly or Qualifying Widow(er)||$12,700||$24,000||$11,300|
|Married Filing Separately||$6,350||$12,000||$5,650|
|Head of Household||$9,350||$18,000||$8,650|
For families with multiple dependent children, the increase in the Standard Deduction will not make up for the loss of the Personal Exemption.
Child Tax Credit Doubled
Tax credits are better than deductions. A tax credit reduces your taxes owed dollar-for-dollar, whereas a deduction only reduces your taxable income.
The child tax credit increased from $1,000 to $2,000. Taxpayers receive a tax credit for each child they claim as a dependent ages 17 and under. Additionally, the new tax law introduced a $500 tax credit for non-child dependents.
Income limits to claim these tax credits also increased. In 2017, the income limits were $75,000 for single filers and $110,000 for married filing jointly. For 2018, the income limits increased to $200,000 and $400,000, respectively. The result is that far more families will be able to receive this credit in 2018.
Mortgage Interest Deduction Reduced
For people who bought a home in 2018, the mortgage interest deduction declined. Previously, interest on the first $1 million of mortgage balances could be deducted. Starting in 2018 for new homebuyers, the limit shrank to $75,000.
The interest on home equity loans and lines of credit are no longer deductible. With this deduction eliminated and interest rates rising, many homeowners are considering a mortgage refinance to consolidate their HELOC into their mortgage. Click here to review and compare your mortgage options.
State and Local Taxes Capped at $10,000
The deduction of state and local taxes offered valuable federal tax relief for taxpayers dealing with the double-whammy of high state taxes and high property taxes. Capping the deduction of the SALT taxes at $10,000 will impact these taxpayers the most.
New York and California are examples of states with both high state income taxes and high property tax rates. Taxpayers with expensive homes will pay even more by these changes.
A Streamlined Form 1040
The IRS is set to introduce a streamlined Form 1040 that will be shorter and simpler. Early versions of the new Form 1040 are half the size of the previous version. And it will replace the Form 1040A and Form 1040EZ.
In previous years, taxpayers were unsure of which tax form was appropriate for their situation. With the new Form 1040, everyone will be using the same base tax form.
Taxpayers with a simple return can finish their taxes with the basic Form 1040. While others with more complicated taxes will supplement their returns with additional supporting schedules, just as they have in previous years.
How To Prepare For 2018 Tax Season
Now that we know what the changes are, we need to prepare to file our taxes. Here are four simple steps you can do today to get ready.
Organize Your Tax Documents
Whether you store your tax documents digitally or in paper form, it pays to keep them all together. Ideally, you will keep similar documents grouped together to make searching for them easier.
Personally, I scan all paper documents and download digital copies into folders based on the type of income or expense they are. For example, I have separate folders for W-2s, 1099s, mortgages, daycare expenses, and medical expenses.
Keep prior year tax returns handy as well. Information from previous returns can impact your current tax return, such as tax-loss carryforwards.
Meet With Your Tax Professional
Before year-end, reach out to your tax professional and ask if there are any year-end moves that he recommends. Many tax professionals charge by the hour, so prepare questions ahead of time to keep the conversation on track. If you sold stock, received a bonus, or experienced major life changes, there may be opportunities to reduce your tax bill before the end of the year.
During your appointment, you should also schedule your tax appointment before his calendar fills up.
Make Retirement Account Contributions
Setting aside money for your future can reduce your tax bill today. Speak with your tax professional or financial advisor about available options. Consumers can open accounts and make IRA contributions through April 15th. However, business owners must have their accounts established before year-end to count for the current tax year.
Track Business Income and Expenses
Whether your business is a side hustle or full-time endeavor, you must track your business income and expenses. Most business expenses are easy to identify, like inventory, rent, and wages. However, there are many business expenses that entrepreneurs overlook, such as automobile expenses, home office deductions, conferences, and continuing education. These expenses are just as important to running your business and there is an opportunity to deduct them. Speak with your tax professional if you have questions about what is and isn’t considered a business expense.
Knowledge is power and preparation is key
As you head into the 2018 tax season, having a solid understanding of how the Tax Cuts and Jobs Act affects you will guide your year-end tax moves. Tax laws can be complicated and difficult to understand, so it is recommended that you speak with a qualified tax professional. To make the conversation run smoother, organize your tax documents as they arrive and prepare questions ahead of your appointment.
If you cannot pay your taxes owed, consider a personal loan. The IRS charges interest and penalties on unpaid taxes which can be higher than what a bank would charge. Click here to read reviews and compare options for a personal loan.
Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better.