Recent tax reform has changed the tax code to our individual taxes and it presents the biggest change to taxes since the 1980s. There has been a lot of discussion and confusion over the new tax codes and how it will affect individuals. Here is an overview of the tax changes that affect most of us, and what you can expect.
The Standard Deduction Nearly Doubles
The Standard Deduction change is probably the most talked about issue with the new tax laws. It is anticipated that with a higher Standard Deduction that there will be far less returns filed with Itemized Deductions. The Standard Deduction will increase to $12,000 for single, and Married Filing Separate returns. This amount is $18,000 for Head of Households, and $24,000 for Joint-Return filers. In comparison, the previous standard deduction was $6,350, $9,350, $12,700 respectively.
No More Personal and Dependent Exemptions
Previously, each taxpayer was able to claim a Personal Exemption of $4,050 for themselves, a Spouse, and/or a Dependent. This exemption is no longer available.
Miscellaneous Itemized Deductions Are Eliminated
This is another change that is getting a lot of buzz-talk. It will be another reason why many more tax filers will not be Itemizing Deductions and will simply opt for the Standard Deduction instead. No longer will you be able to deduct Itemized Deductions such as unreimbursed job expenses, tax preparation fees, and moving expenses (excluding members of the armed forces). Below is a list of other previously approved Itemized Deductions that you can no longer claim:
Unreimbursed employee expense
Professional and Union Dues
Employee Education Expenses
Job-Seeking Expenses
Investment Fees
Tax Preparation Fees
Uniforms
The Child Tax Credit Increases
Qualifying children under the age of 17 are eligible for a Child Tax Credit (CTC) that increases from $1,000 to $2,000. In order to receive the credit, the dependent must have a social security number. The Additional Child Tax Credit (ACTC) has also been combined with the CTC. This results in a refundable credit of up to $1,400 after removing your tax.
A New Cap on State and Local Taxes Deduction
Previously there was not a cap in place for State and Local Taxes (SALT) paid and the deduction you could claim. That is no longer the case. The maximum deduction for SALT is now $10,000. This includes state and local income, real estate and personal property taxes.
No More Alimony Deductions
Divorcees who make alimony payments can no longer deduct that amount on their federal taxes for agreements dated after 12/31/2018
Mortgage and Home Equity Interest Deductions
Mortgage interest used as a deduction has been capped at $750,000. The previous cap was $1 million. In addition, Home Equity Interest you pay is no longer deductible. This includes all Home Equity Loans and Lines of Credit. However, the IRS does state that these are still deductible if they are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. As an example, you cannot deduct the use of the loan for credit card debt and living expenses. The loan must be used for the taxpayer’s main or second home, and cannot exceed the cost of the home.
Income Tax Brackets Will Remain the Same
There was a lot of talk that the new tax laws would reduce the number of tax brackets, but that is not the case. There are still 7 tax brackets. Your tax bracket is the rate you pay on each dollar of taxable income over a certain amount. As an example, a single person with $50,000 taxable income would fall in the bracket that pays a 22 percent tax. All but the lowest brackets are set to pay a lower tax amount than the set-up of the previous tax brackets.
There are several other tax changes that could affect you as well, but these are the highlights. As always, it is best to check with a qualified OFWF tax advisor if your situation is different or includes taxes or deductions not covered here.