Get ready for some major changes when filing this year
Americans for the first time will contend with the massive overhaul of U.S. tax laws that Congress passed and President Donald Trump signed at the end of 2017. Expect some big changes.
Seven out of 10 American will see their taxes decline, according to the Tax Policy Center, a Washington think tank, but they may not get there without a little heartburn. The standard deduction has nearly doubled. The write-offs for state and local taxes have shrunk. The personal exemption is gone. Even the tax forms have changed.
“It will be a year of confusion,” said David Donnelly, a partner at accounting firm Carr, Riggs & Ingram in Houston.
Here’s a look at some of those changes and what taxpayers might consider as they navigate them.
Form 1040
The 2018 Form 1040 has been completely redesigned and simplified. There is now only one form for all taxpayers to use. All others, such as the 1040EZ or 1040A forms, have been eliminated. The new 1040 Form has been reduced from 79 lines to 23 and is said to be “postcard-sized,” which is a bit of an exaggeration as it still takes up a half an 8.5-by-11-inch piece of printer paper, front and back.
The lines removed from the form are in six “schedules” or attachments, which taxpayers can add to their 1040 Form depending on their individual needs. For example, additional schedules can be selected for those who need to report capital gains or self-employment taxes.
About 90 percent of the 150 million tax-paying Americans now e-file using tax software such as TurboTax or TaxSlayer, which ask questions about income and other financial matters, does the math and fills out the form automatically.
Income tax rates
The new law keeps seven tax brackets but lowered the rates in some of those brackets. For example, a married couple filing jointly with an income of $175,000 had a marginal tax rate of 28 percent in 2017. In 2018, that rate falls to 24 percent. On the lower end of the scale, a single taxpayer making $50,000 was in the 25 percent bracket in 2017. In 2018, the rate slipped to 22 percent.
The biggest changes came at the top of the income scale. The top marginal tax rate fell to 37 percent from 39.6 percent. The amount that brings taxpayers into the top tier was also raised. For example, a married couple filing jointly would have to earn at least $600,000 to get into the top tax bracket, up from $470,700 in 2017.
“That’s why it’s deemed that the wealthy got a break on this,” said Jan Meade, an accounting professor at the University of Houston’s Bauer College of Business.
Standard deductions
The tax overhaul nearly doubled the deduction, which means that for many taxpayers it will no longer be worth it to itemize deductions such as mortgage interest or charitable donations. In fact, the Congressional Joint Committee on Taxation estimates the number of households choosing to itemize deductions will drop from 46.5 million in 2017 to 18 million in 2018.
The standard deduction for single filers is $12,000 (up from $6,350 in 2017). For married couples who file jointly it’s $24,000 ($12,700 in 2017). That means a married couple filing jointly and claimed itemized deductions of $15,000 in 2017 will benefit by claiming the standard deduction
Not only is it a timesaver, but they will be able to deduct an additional $9,000.
Meade said those with modest incomes will come out ahead by using the higher standard deduction. But not everyone benefits: Married couples who own big houses and have high property taxes could lose on deductions.
Changes to state and local tax deductions
Among the most controversial changes adopted by Congress were limits on deductions on state and local property taxes, now capped at $10,000. And that means itemizers who own big houses with big property tax bills could take a hit.
Take, for instance, a married couple filing jointly who paid property taxes on their home of $20,000 and contributed $8,000 to qualifying charities in 2017. Their itemized deductions are $28,000. In 2018, they again pay property taxes of $20,000 plus $8,000 of qualifying charitable contributions. But because the tax deduction is capped at $10,000, their itemized deductions are limited to $18,000 and they claim a standard deduction of $24,000 instead — $4,000 less than in 2017.
It gets worse, too, when you consider that Congress eliminated the personal exemption of $4,050. For this married couple, it’s another $8,100 that they’ll be unable to use to lower their taxes, meaning their deductions and exemptions would shrink from about $36,000 to $24,000.
“The losers in the deduction world are those that have property and sales tax in excess of $10,000,” Donnelly said. “Also, if you had any miscellaneous itemized deductions, such as attorney fees, investment expenses, or employee business expenses and these caused your itemized deductions to exceed $24,000, you would be a loser.”
Family tax credits
For 2018, the maximum credit increased from $1,000 to $2,000 per qualifying child, but to claim the credit, the child must have a Social Security number issued before the due date of the tax return, including extensions.
Also, the income threshold at which the child tax credit starts to phase out has been increased to $200,000 for single and head of household filers or $400,000 for married filing jointly. Before the new tax law went into effect, those limits were $75,000 and $110,000, respectively.
Cuts to deductions
New for the 2018 tax year is the suspension of a deduction for job-related expenses listed under “miscellaneous itemized deductions.” Previously, an employee who was not reimbursed by their employer for certain business expenses could deduct those costs in their taxes if they exceeded 2 percent of a taxpayer’s adjusted gross income. Those deductions ranged from uniforms, union dues, and business-related meals, to entertainment and travel. Now, none of those deductions is accepted. Accountants advise employees to make sure they get reimbursed by their employers.