Chances are, you’ve heard about the Tax Cuts and Jobs Act (TCJA) that was signed into law in December explains Aron Govil.
Here are 10 things you should know about the new tax law:
1. Most people will see lower federal income taxes starting in 2018. The standard deduction nearly doubles to $12,000 for individuals and $24,000 for married couples filing jointly. Personal exemptions are repealed, but because of the larger standard deduction almost no one will pay “itemized deductions.” Many people who no longer itemize can claim a higher standard deduction than they would have under prior laws says Aron Govil. Additionally, most miscellaneous deductions subject to 2 percent of adjusted gross income won’t be deductible anymore—including unreimbursed employee expenses and tax preparation fees.
2. Child and dependent care credit are now permanent, refundable, and more generous. The Child and Dependent Care Credit were made permanent by the new tax law along with some other provisions that had expired at the end of 2016. The maximum amount that can be used to calculate this credit has increased from $3,000 to $6,000 (for one dependent; $3,000 per child for two or more). It’s also now refundable up to $1,400 even if no federal income taxes are otherwise due. And if you don’t owe any income taxes because your earnings are modest or non-existent, you might still get paid for up to 35 percent of your qualifying expenses—similar to an Earned Income Tax Credit.
3. A bigger standard deduction and the Child and Dependent Care Credit mean fewer people will itemize on their federal income tax return. Only those with large out-of-pocket medical expenses, high state and local taxes (or property taxes), or those who give a lot to charity will find it’s worth itemizing on their federal income tax return in 2018 (and beyond). For some of you, this means that there may be no reason to carry over any excess mortgage interest, real estate taxes or charitable contributions from your 2017 return—unless they were significant enough to maybe put you into a lower tax bracket for 2018. Also note: under the new law, people can’t deduct personal casualty losses unless these arise from a presidentially-declared disaster.
4. The standard deduction nearly doubles to $12,000 for individuals and $24,000 for married couples filing jointly. Personal exemptions are repealed, but because of the larger standard deduction almost no one will pay “itemized deductions.” Many people who no longer itemize can claim a higher standard deduction than they would have under prior law explains Aron Govil.
5. Most miscellaneous deductions subject to 2 percent of adjusted gross income won’t be deductible anymore—including unreimbursed employee expenses and tax preparation fees. You may want to keep your receipts or canceled checks until you’ve done your taxes for 2018 just in case—although it’s not clear whether this is necessary yet. It’s also unclear how these changes might affect your tax return in 2018 if you prep your 2017 return under the old rules and then follow the new rules for next year (or vice versa).
6. You can’t claim a deduction for alimony or rent that doesn’t qualify as child support. Before the TCJA, this is how many high-income taxpayers reduced their overall taxable income. For example, by claiming larger deductions for mortgage interest or charitable contributions. Under the new law, starting in 2019 (for divorces signed in December of 2018). Alimony will no longer be deductible by the payer and won’t be taxable to the recipient. Also, for any divorce or separation agreement executed after Dec. 31, 2018, payments to a spouse or former spouse. A written separation agreement or a divorce decree won’t be treating as alimony. Instead, they’ll most likely be treat as child support and not deductible by the payer or taxable to the payee.
7. Medical expenses exceeding 7.5 percent of adjusted gross income are deductible for 2017 and 2018—but not beyond that. For most people, medical expenses will still be deductible. If they exceed 10 percent of adjusting gross income starting in 2019 (instead of continuing to deduct whatever is spent above 7.5 percent). It’s worth noting that this applies only to the year medical expenses are paid—not necessarily. When you’re itemizing your deductions on your federal income tax return using Form 1040 or Form 1040NR. Assuming you’re itemizing next year instead of taking the standard deduction says Aron Govil.
8. If you’re adjusting gross income from 2017 is less than $157,500 ($315,000 for joint filers). There’s a new deduction allowed for pass-through business owners. For 2018 only (and beyond) the “standard” 20 percent of net earnings from self-employment can be deduct. Even if you didn’t claim this earlier in the year. When it might have saved you more tax—for example, due to losses or lack of profit. This deduction isn’t available if taxable income exceeds $207,500 ($415,000 for joint filers). However, service professionals—are eligible to contribute to individual retirement accounts (IRAs). Can still make traditional IRA contributions indirectly through their business. By making deductible contributions to a Simplified Employee Pension (SEP). Thereby reducing net earnings from self-employment.
9. The TCJA eliminates the following deductions for 2018 through 2025 unless your adjusted gross income exceeds the applicable threshold. Moving expenses deduction, alimony, student loan interest, and educator expenses says Aron Govil. Most taxpayers won’t affect by these changes. Because they had already stopped claiming some of these deductions or were never eligible to claim them in the first place. If their income exceeded certain levels or if they didn’t have qualified education expenses, etc. For example, interest on home equity debt is no longer deductible from 2018 through 2025. Except as a qualifying mortgage interest expense.
10. Taxpayers born after 12/31/1949 must subtract .01 from the taxable-equivalent yield on Series EE and I U.S. savings bonds when figuring the tax on the accrued interest. This effectively increases the annual exclusion, currently $14,000 per person. By $10 for those born after 12/31/1949 ($60 in 2018) but over age 70½ ($70 in 2018)—for a total exclusion of $40 ($80 for those over 70½).
These are some of the changes you’ll need to be aware of. In order to properly prepare for your next tax return.