The new tax code includes a lot of changes for 2018. Here are some big updates that could increase your tax refund or make you owe the IRS.
By Melissa Burden
While you may be putting the final touches on your 1040 for 2017, by this time next year, the federal government’s sweeping tax reform could have your return looking quite different, tax experts say.
The Tax Cuts and Jobs Act was signed into law in December by President Donald Trump. It includes a slew of changes to the U.S. tax code — many aimed to benefit businesses — that go into effect this year. The tax act includes big changes to tax brackets, doubles the standard income tax deduction and increases the Child Tax Credit. Many of the provisions are temporary, due to sunset in 2025.
“You and your neighbor could have completely different impacts from tax reform,” says Anthony Licavoli Jr., tax manager and certified public accountant at Rehmann in Troy. “But, in general, most people should see lower taxes.”
Below are some of the top changes that could impact your 2018 federal tax return and help determine if you will owe or get a refund.
Seven brackets remain, but the percentages for five of seven brackets dropped. The 2018 tax rates are: 10 percent; 12 percent; 22 percent; 24 percent; 32 percent; 35 percent and 37 percent. “Most people will see a 3 to 4 percent decrease in their tax bracket rate,” says Jeff Goins, a certified public accountant with Fenner, Melstrom & Dooling in Birmingham. Taxpayers who, in 2017, fell into the 15 percent bracket will see that shift to 12 percent, while the 25 percent bracket drops to 22 percent. A married couple with taxable income of up to $237,950 in the 28 percent bracket in 2017, will drop to the 24 percent bracket. And that bracket allows for up to $315,000 in taxable income.
You may have already noticed a slight boost in your paycheck thanks to changed withholding tables that employers started to implement in February. “All of 2018, people should have a little more disposable income in their pocket,” Goins says. While it’s not a huge change, Goins says a single taxpayer making $75,000 a year could bring in another $2,000.
Standard Deduction/Personal Exemptions
The standard deduction will nearly double to $24,000 for married couples; $18,000 for those filing as head of household and $12,000 for singles. But the personal exemption, which had been worth about $4,000 a person, goes away.
Child Tax Credit
This credit has been boosted from $1,000 to $2,000 for dependent children under 17. Of that credit, $1,400 is refundable, which can drive tax liability to zero and trigger a possible refund to the taxpayer. A new $500 nonrefundable credit could apply to dependents who are not children such as an elderly parent.
An estimated 30 percent of Americans today itemize deductions on their income taxes instead of claiming the standard deduction, according to a 2017 Congressional Research Service report. But that’s going to change to just an estimated 5 to 6 percent of Americans, say Goins and Wayne Titus, a personal financial specialist and accredited investment fiduciary analyst with AMDG Financial in Plymouth. With higher standard deduction amounts, the threshold to make it worthwhile to itemize will be tougher, experts say.
For some taxpayers, the loss of personal exemptions coupled with itemizing changes may mean they end up owing, Licavoli says. Many, however, will benefit and enjoy not having to tally itemized deductions.
“Some people are going to be happy and other people are not,” Titus says.
Deduction Changes Affecting Itemizing
Deductions for state, local and property taxes are now capped at $10,000. There was no cap previously. Taxpayers may still deduct interest on mortgage debt. Yet those who take out a new mortgage can deduct up to $750,000 of the interest paid on the debt, down from $1 million. Home equity line of credit interest is also no longer deductible.
Under the new law, people can withdraw up to $10,000 a year per child from 529 savings plans to pay for elementary and secondary school tuition. This change is permanent, Titus says. The 529 savings plans, until now, have been set up to save for college. Money in the accounts grows tax free. “That’s a huge deal,” Goins says. “In the past, there was no tax advantageous way to pay for your child’s K-12 expenses.”
Other Changes Under Tax Reform
There are also changes affecting estate taxes, the Alternative Minimum Tax, alimony, medical expenses and for small business owners who deduct business income on their personal returns, experts say. Tax reform also eliminates a penalty for not having health insurance. It also axes deductions for moving expenses, tax preparation and investment adviser fees.
“The bottom line on all of this is the new tax law is complex,” Titus says. “There’s implications for consumers, for business owners, and if you’re concerned about how that new tax law specifically affects you, you should find an adviser who is knowledgeable about taxes.”
Tax Savings For Taxpayers Not Itemizing (Comparing 2017 to 2018):
- An individual making $50,000 a year will save about $1,300 a year.
- A married couple with no children making a combined $100,000 will save about $2,500 a year.
- A married couple making a combined $100,000 a year with two children who each qualify for the Child Tax Credit will save about $3,000.
Source: Fenner, Melstrom & Dooling