As of January 31st, everyone’s W-2 forms and 1099s should have been mailed. As you begin to gather all your tax documents and get ready to file your income taxes for 2018, I want to remind you that a lot has changed since last year. One misconception a lot of people have is that with all the tax cuts my refund should be bigger. Well, not necessarily. There will be many that will benefit from the lower tax rates, higher standard deductions, and higher child tax credit. However, there will be those who will be hurt by the loss of unreimbursed tax expenses, changes in the withholding tables, the SALT limitation, and the loss of the exemption deductions. So, what can you expect when you file your taxes this year?
Your refund or the dreaded amount of taxes owed will be affected by several big changes in the new laws. Of course, there are some changes that will not be felt as widespread. Below is a brief highlight of some of the big changes and how they can impact you.
Lower tax rates
Let's start on a positive note for all! Tax rates will be lower in 2018 than they were in 2017. While there was little change to the 10% bracket, the other brackets were dropped to lower rates. Instead of a 15% bracket now it is 12%. The 25% bracket dropped down to 22%. As well did all of the higher brackets. The top overall bracket is now 2.6% lower than in 2017 as it dropped from 39.6% to 37%. Also, some of the brackets were expanded. There will be married filing jointly couples that will have income taxed at 24% in 2018 compared to it being taxed in the old 33% bracket in 2017. That is a 9% savings!
Your taxes withheld
Under the new law, the IRS overhauled the tax withholding tables, that employers use to determine how much income tax to be withheld from your paycheck based on the number of allowances you claim and how much you earn. Generally, the new tables withheld less taxes on employees to reflect the lower tax rates. So, while your taxes may be lower due rates, your refund or taxes owed may be about the same or less because you did not have as much withheld as in prior years.
Another surprise that you may face as a taxpayer with withholdings is if you have multiple jobs. If you are not having enough withheld, you may get a surprise come tax time. Employers do not know how much you are making at other jobs and are withholding based on the information that you have provided them.
Be prepared to discuss with your tax preparer about whether you need to look at making any changes in withholdings or if estimated tax payments would be recommended for the upcoming year.
Itemized deductions
The new tax code nearly doubled the standard deduction but removed many itemized deductions. Those changes include a $10,000 cap on the amount of state and local taxes that can be claimed, and the elimination of miscellaneous itemized deductions, such as unreimbursed employee expenses and investment fees. It also made some home equity loan interest non-deductible. All of these changes mean that more people will be using the standard deduction. While some may benefit, others will hurt. Especially those that paid a lot in state taxes and that had a lot of unreimbursed job expenses.
Exemptions Gone
The new tax code did away with the deduction for each person claimed on the tax return. In prior years, there has been a deduction for each dependent claimed on the return that was adjusted based on inflation. In 2017, the amount was a $4,050 deduction for each person claimed on the tax return. This means a family of four would have a deduction of $16,200. Starting in 2018 this deduction no longer exist.
Child Tax Credit
One very helpful thing under the new tax act is the increased child tax credit that will be available to more taxpayers. The credit has increased from $1,000 to $2,000 per qualifying child under the age of 17. Also, the AGI threshold where the credit starts being reduced was raised from $110,000 for married couples to $400,000. For dependents over the age of 17, the new tax code does include a nonrefundable $500 credit. This credit can include an aging parent or children over 17.
New qualified business income deduction for small businesses
A new deduction this year will be for qualified small businesses. This deduction is based on 20% of the qualified profit for most small businesses. If you are self-employed, a partner in a partnership, or shareholder in an S-Corp, I highly recommend that you seek professional tax guidance this year. This deduction can be affected by a lot of factors and has some limitations. However, with the right guidance and strategy it can be very beneficial to small business owners.
What to expect
As you can see from this article, tax returns will be greatly affected by some different factors in 2018. There are other changes that I did not discuss such as the changes to casualty losses, moving expenses, and other deductions that have been altered or done away with completely. While your standard deduction may be higher, you will lose the dependent exemption deduction. The child tax credit will benefit those who qualify which is another factor to consider. Also, the tax rates and brackets have all changed. Some people will owe less tax, while others may owe more.
I do expect some delays and issues from the government shutdown and with all of the changes that the IRS has had to make to its system to reflect all of those changes with the new tax law. I look for customer service from the IRS to take even longer and to struggle in some areas. Hopefully, most taxpayers refunds will still be issued in a timely manner, but I would not be surprised if in some cases that refunds take longer too.
I highly recommend that you sit down with a CPA to discuss your tax documents and the events of 2018 to make sure that you get all of the deductions and credits that you deserve. Also, have the mindset that hopefully, the overall effect of the new tax law will be better for you but do be ready to learn and understand the reason why if it has had a negative effect on your return. We work hard to keep up with all the changes so that we can make our clients filing experience as pleasant as possible!