With everybody talking about lower taxes and the many changes soon to be introduced, it’s normal to feel either confused or overwhelmed. Fortunately, we’ve compiled the most important changes and what it could mean for you!
Lower Tax Rates and Increased Deductions
Not only have tax rates lowered, but income thresholds have expanded too. What does this mean? Essentially, a larger percentage of your income will fall under the lower rate.
Furthermore, the new tax law expands the number of families eligible for child tax credit and offers a larger standard deduction. In fact, personal exemptions have been eliminated and child tax credit has doubled to $2,000 per child; this credit only phases out now for couples with adjusted gross income of $400,000 ($200,000 for all other filers).
Meanwhile, it’s good news for standard filers who can now claim a standard deduction of $12,000 (compared to $6,350 from 2017). For married couples and taxpayers over 65, the standard deduction has enjoyed a similar boost.
Should you itemize deductions? Although we encourage everybody to assess carefully, it will generally be beneficial to those with a large mortgage, who made large contributions to charity, or if you have unreimbursed medical expenses.
When it comes to those who don’t itemize, generous tax breaks may be available for families with a child in college; it could also allow for ‘above the line’ deductions.
Summary of Deductions
Here’s a summary of popular tax breaks that have either been removed, changed, or sidelined:
- Previously, moving costs while relocating could be deducted but this is now only available to active military members.
- For all divorcees since the start of 2019, alimony payments can no longer be deducted.
- Interest on loans can only be deducted if the money is used for home improvements or building projects.
- Rather than being fully deductible, the amount of local and state taxes one can deduct is now $10,000.
- Unless caused by a hurricane, losses uncovered by insurance cannot be deducted.
- Several itemized deductions have also been removed including the write-off of unreimbursed business expenses, tax preparation fees, and investment fees.
Fortunately for investors anticipating a bear market, taxes on investment gains did NOT increase. However, the capital gains rate is now based on income thresholds rather than tax brackets. To take advantage of the 0% capital gains rate, your taxable income from 2018 must have been lower than $77,200 (couples) and $38,600 (singles).
From 2018, a child’s investment income is now taxed at identical rates to estates and trusts (between 10% and 37%). Although this doesn’t guarantee parents will pay more for a child’s investment income, the changes could increase all taxes when securities owned by children are sold. While parents need to exceed $600,000 (couples) and $500,000 (singles) to be hit by the top capital gains rate, this is just $12,700 for children.
All those self-employed either on a part-time or full-time basis may be able to deduct up to 20% of qualified business income when reporting a profit/loss on Schedule C. As one would expect, there are several caveats to consider including higher standards for affluent professionals so they can’t game the system.
Changes to Disasters
Finally, only federally declared disaster areas will be eligible to deduct for unreimbursed casualty losses. If the disaster does not have the federal designation, losses won’t be deductible, and this includes natural disasters.
Reducing Your 2018 Bill
There we have it, the main changes to the tax code for 2018/2019 and beyond. While the opportunity for most tax-saving strategies has now passed, we’ll end on a couple of tips that might help (speak to a finance professional for extra assistance!):
- Contribute to an IRA
- Contribute to a health savings account