Still befuddled by tax changes? Read on
After the IRS reported that the average tax refund amount was lower than last year, many of you asked for a deeper dive into tax preparation, so here is my version of income tax boot camp.
Every taxpayer needs to determine whether to claim itemized or standard deductions, both of which reduce the amount of income subject to tax.
The Tax Cuts and Jobs Act nearly doubled the standard to $12,000 for singles and married filing separately, $24,000 for married filing jointly and $18,000 for head of household. The larger amount means about 90 percent of taxpayers will claim the standard deduction and their tax prep will be fairly straightforward.
If certain deductions such as mortgage interest, state and local taxes, unreimbursed medical expenses that exceed 7.5 percent of 2018 adjusted gross income and charitable contributions add up to more than the standard deduction amount, then you will Itemize on Schedule A.
You can no longer claim deductions for unreimbursed employee expenses, tax preparation fees and other miscellaneous deductions.
Your total deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000.
The deduction for home mortgage and home equity interest is limited to interest you paid on a loan secured by your main home or second home that you used to buy, build or substantially improve your main or second home.
If you used a home equity loan or line of credit to pay off another debt, like a credit card or student loan, that amount would not be deductible.
There is a new dollar limit on total qualified residence loan balances. If your loan originated after Dec. 15, 2017, you may deduct interest on up to $750,000 in qualifying debt. Before that date, the amount remains at $1,000,000.
The deduction for alimony is eliminated for agreements executed after Dec. 31, 2018, and alimony payments are no longer included as income after this date.
Now that personal exemptions have been eliminated, credits are even more important.
The Earned Income Tax Credit is for workers with low to moderate income (less than about $55,000). Check IRS.gov to determine if you qualify and for how much. The maximum is $6,431 with three or more qualifying children.
The Child Tax Credit has increased to a maximum of $2,000 per qualifying child under the age of 17 and is partially refundable. The income threshold at which the child tax credit phases out increased to $200,000 ($400,000 for married filing jointly).
There is a new credit of up to $500 for each of your qualifying dependents (children over 17 or elderly parents). It is subject to the adjusted gross income phase-out above; check IRS.gov to determine if you qualify.
The American Opportunity (formerly Hope) Credit is partially refundable and worth up to $2500 for four years. The Lifetime Learning has no limit on the number of years you can claim it and is worth up to $2,000 per tax return. Both phase out at $200,000 for singles and $400,000 married filing jointly.
The Alternative Minimum Tax should affect fewer taxpayers because the exemption amount is increased to $70,300 ($109,400 married filing jointly). The income level at which the AMT exemption begins to phase out increased to $500,000/$1M married filing jointly.
Business owners should not count on the new 20 percent deduction for pass-through businesses (Section 199A deduction). The rules are tricky and most do not qualify, so consult the IRS guide for more information.
Jill Schlesinger, CFP is a business analyst for CBS News.