Tax Day is Coming (Part 1): What Changed?
Updated: Aug 2, 2019
Like religion and politics, personal finances are an uncomfortable topic. Taxes are particularly anxiety inducing because of their association with being a functional human. Recent changes to tax laws haven’t helped: 77% of workers are confused by the 2018 Tax Cut and Jobs Act. Given the confusion, FloatMe’s Financial Education team has assembled a bundle of resources to help everyday employees (and their families) taxes less stressful.
What is Different from Last Year?
(If you have never filed taxes before, you may want to wait until Part 2!)
If you have previously filed taxes, you may have some surprises waiting for you this tax season. Some will be welcome, some frustrating, and some may be simply confusing. Below are some of the biggest changes:
Simplified Form 1040
There are many changes from last year, but the biggest is a simplified tax form. No longer do you have to decide between filing a 1040EZ, 1040A, or 1040 tax form. Instead, there is a single Form 1040 to which supplemental schedules are attached (the IRS states that most tax filers will not need to attach schedules) for more complex situations.
New Tax Brackets
Tax brackets have been changed significantly for individuals. While there are still seven, the tax rates for each bracket have mostly been reduced.
Some filers may see a benefit from these reduced rates, but other changes listed below may affect tax returns (positively and negatively)
The Standard Deduction (Almost) Doubled
The Tax Cuts and Jobs Act nearly doubled the standard deduction from previous levels. Itemizing deductions is still an option, but most Americans are expected to file using the standard deduction- previously ~70% used standard deductions and ~95% are projected to for 2018 and beyond.
The Personal Exemption is Gone
Unfortunately, not all changes introduce larger tax returns or affect all Americans equally. Though the standard deduction doubled, the personal exemption is no longer available. A personal exemption is a certain amount of income Americans are permitted to exclude from their taxable income. In previous years taxpayers could claim one exemption for themselves, their spouse and one for each dependent. In 2017, each personal exemption was an effective $4100 tax deduction. Given there was no limit to how many exemptions taken, larger families will not benefit from this change.
The Child Tax Credit Has Doubled
Despite the loss of personal exemptions, the Child Tax Credit has increased to $2000 per qualifying child under the age of 17 and it has become less restrictive. It is important to note that tax deductions reduce your taxable income (if you made $40,000 and had a $1,000 deduction the IRS would consider $39,000 for taxes) whereas tax credits reduce the amounts of taxes you owe, dollar for dollar (if you owed $2000 in taxes, a $1000 tax credit would lower that to $1000). This makes them more valuable than an equal tax deduction.
Education Tax Breaks Remain
The two most popular tax credits for education, the American Opportunity Credit and the Lifetime Learning Credit, remain unchanged.
Mortgage Interest Deductions Have Been Reduced
Mortgage interest deductions have been changed significantly. First, the cap (limit) on the total election allowed has been reduced to interest on up to $750,000 of qualified residence debt or mortgage principal on a primary or secondary home (reduced from $1 million) though homes obtained prior to December 15, 2017 are grandfathered in to the higher limit.
The additional limit that allowed taxpayers to deduct interest on up to $100,000 of home equity debt has been eliminated, though interest on a home equity loan may still be used as a deduction if and only if it was used to substantially improve your home. In this case, it become qualified residential debt and is counted as part of the $750,000 cap.
The State and Local Tax Deduction is Limited
The State and Local Tax (SALT) deduction has now be limited to a total of $10,000. For Americans living in high tax states and municipalities this may prove a major burden.
The (New) Pass-through Income Deduction
If you own a pass-through entity such as sole-proprietorships, partnerships, LLCs, and S-Corps or receive income from real estate and dividends from Real Estate Investment Trust stocks you are able to file or a 20% deduction for “pass-through” income. It is relevant to note at “professional services” businesses such as lawyers, doctors, and consultants have a phase out threshold of $157,000 AGI (single filers) or $315,000 (married filing jointly). The exemption amounts have also been increased significantly.
The New Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is designed to ensure that high income taxpayers pay their fair share of taxes, even if they are entitled to lots of deductions and credits. However, the main problem with AMT has been that it was never indexed to inflation which meant that it applied to more and more Americans.
The charitable contributions deduction has been raised from 50% to 60% of taxpayers adjusted gross income. However, donations made to colleges and universities in exchange for the right to purchase athletic tickets are no longer deductible.
Estate Tax Applies to Fewer Filers
Previously, the estate tax (a tax on inherited wealth) only applied to the wealthiest U.S. households but the Tax Cuts and Jobs Act makes it apply to even fewer. Under the new law the tax applies only to the portion of an estate in excess of $11.18 million. Previously this threshold was $5.59 million.
Say Farewell to These Old Favorites
Moving Expenses: Unless you are moving for purposes related to active-duty military services this deduction no longer applies.
Casualty and theft losses: Previously, if your home was burglarized you could deduct the value of stolen items. Now, this deduction can only be applied for losses attributed to a federally declared disaster.
Unreimbursed employee expenses: If you were not reimbursed by your employer, you may no longer deduct these expenses. So, make sure you are reimbursed!
Alimony payments: Alimony payments are no longer deductible.
Miscellaneous deductions: This category used to include a long list of deductions exceeding 2% of AGI such as unreimbursed employee expenses, tax preparation expenses, and more. Starting in the 2018 tax year, this category is no longer available to file.
The Key Takeaway
The 2018 tax year presents numerous changes which may affect your return. This list, while not fully comprehensive, offers an overview of the largest changes most likely to affect our reader’ returns. Keep an eye out for Part 2, coming in the next 7 days! If you have any questions, send us an email at firstname.lastname@example.org or comment on our social media:
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