Originally posted on March 18, 2019
Like religion and politics, personal finances are an uncomfortable topic. Taxes are particularly anxiety-inducing. Recent changes to tax laws haven’t helped: 77% of workers are confused by the 2018 Tax Cut and Jobs Act.
That’s why FloatMe’s financial education team has assembled a bundle of resources to help everyday employees (and their families) to make taxes less stressful.
What’s different from last year?
(If you’ve never filed taxes before, you may want to wait until part two!)
If you’ve filed taxes in the past, you may have some surprises in store this tax season. Some will be welcome, some frustrating and some will simply be confusing. Let’s take a look at some of the biggest changes.
Simplified Form 1040
There are many changes from last year, but the biggest is a simplified tax form. You’ll no longer need to decide between filing a 1040EZ, 1040A or 1040 tax form. Instead, there’s a single Form 1040 to which supplemental schedules are attached for more complex situations. The IRS states that most tax filers won’t need to attach schedules.
New Tax Brackets
Tax brackets have significantly changed 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 note that some of the other changes listed below can affect tax returns both 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. Around 70% used standard deductions in the past, while around 95% are projected to for 2018 and beyond.
The personal exemption is gone
Unfortunately, not all changes 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 that Americans are permitted to exclude from their taxable income. In previous years, taxpayers could claim one exemption for themselves, one for their spouse and one for each dependent. In 2017, each personal exemption was effectively a $4,100 tax deduction. Given that there was no limit to how many exemptions could be taken, larger families could lose out due to this change.
The child tax credit has doubled
Despite the loss of personal exemptions, the child tax credit has increased to $2,000 per qualifying child under the age of 17, as well as becoming less restrictive. It’s 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 amount of tax you owe, dollar for dollar (if you owed $2,000 in taxes, a $1,000 tax credit would lower that to $1,000). 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 changed significantly. First, the cap (limit) on the total amount 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 15th 2017 are grandfathered into 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 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 it was used to substantially improve your home. In this case, it becomes 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 been limited to a total of $10,000. For Americans living in high tax states and municipalities, this could prove to be a major burden.
The (new) pass-through income deduction
If you own a pass-through entity such as a sole-proprietorship, a partnership, an LLC or an s-corp or receive income from real estate and dividends from real estate investment trust stocks, you’re able to file for a 20% deduction for “pass-through” income.
“Professional services” businesses, such as lawyers, doctors and consultants, have a phase out threshold of $157,000 AGI (single filers) or $315,000 (married and filing jointly). The exemption amounts have also been significantly increased.
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’re entitled to a lot 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. These new exemption amounts are designed to combat that.
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’re moving due to active duty military service, this deduction no longer applies.
- Casualty and theft losses: Previously, if your home was broken into, 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 weren’t reimbursed by your employer, you can no longer deduct expenses – so make sure you’re 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.
The Key Takeaway
The 2018 tax year presents numerous changes which could affect your return. This list, while not fully comprehensive, offers an overview of the changes that are the most likely to affect our readers’ returns.
Keep an eye out for part two, coming out in the next week. In the meantime, if you have any questions, feel free to send us an email at firstname.lastname@example.org or to comment on our social media: Instagram | Facebook | Twitter | LinkedIn.
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