What You Need to Know About the New Tax Law
Before filing your tax return this year, it’s important to know the key changes to the new tax reform bill and how it will affect you.
Many new changes from the Tax Cuts and Jobs Act (TCJA) will be in effect for the 2018 tax year. Here are six things you need to know before filing your taxes.
Tax Brackets and Rates
There are still seven tax brackets, but the rates have changed slightly. Below is The Motley Fool’s table of the new tax rates that apply to the 2018 tax year (taxes filed in 2019):
|Marginal Tax Rate||Single||Married Filing Jointly||Head of Household||Married Filing Separately|
|37%||Over $500,000||Over $600,000||Over $500,000||Over $300,000|
Prior to the 2018 tax year, tax rates were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
New Standard Deductions
The standard deduction has almost doubled due to the Tax Cuts and Jobs Act.
When filing taxes, you have two choices for taking deductions. You can either claim the standard deduction, which is a set amount, or itemize your expenses if your allowable expenses are greater than the standard deduction.
Starting in 2019 for the 2018 tax year, the standard deduction for each filing status is as follows:
Single ………………………………………………………………..$12,000 …….(previously $6,350 in 2017)
Married filing jointly. Qualifying widow(er) ………$24,000 …….(previously $12,700 in 2017)
Married filing separately …………………………………..$12,000 …….(previously $6,350 in 2017)
Head of household …………………………………………….$18,000 …….(previously $9,350 in 2017)
Currently, about 70 percent of taxpayers choose to take the standard deduction, according to recent data from the IRS.
Changes to Itemized Deductions
With significant changes to itemized deductions and nearly doubled standard deductions, it is likely that the majority of people will choose the standard deduction.
One noteworthy change is the modification of the limit for charitable contributions of cash. The limit has increased from 50 percent to 60 percent of adjusted gross income (AGI). Those who itemize can deduct more charitable contributions this year.
Another change that could be beneficial is the modification of medical and dental costs. Previously, unreimbursed medical expenses had to be greater than 10 percent of AGI to be deductible for most taxpayers. Now, certain unreimbursed medical costs that exceed 7.5 percent of AGI are deductible.
A change that may not be as favorable, however, is the limit to state and local taxes. Taxpayers can still deduct state and local income, as well as sales and property taxes, but only up to $10,000, or up to $5,000 for those married filing separately. In previous years there were no caps on state income tax, state sales tax or property tax.
Doubled Child Tax Credit
Although exemptions for dependents have been abolished, the maximum child tax credit has increased from $1,000 to $2,000 for children under 17.
Additionally, a new credit of $500 is available for other dependents, including children over the age of 17 (such as college students) or elderly parents. Each qualifying dependent has to be to a U.S. citizen, U.S. resident alien, or U.S. national.
Beginning in the 2018 tax year, children must have a Social Security Number to qualify for the Child Tax Credit or Additional Child Tax Credit. However, children are not eligible for either credit if they have an Individual Taxpayer Identification Number (ITIN).
No More Deductions for Moving Expenses
Under the new law, taxpayers can no longer deduct moving expenses, including the use of a vehicle during a move. This does not apply to active duty U.S. military members who move due to a military order. It also does not apply to companies that move. Small business owners can still claim moving costs on their business taxes.
If you move and your company reimburses you, you will no longer be taxed on reimbursements, since that does not count as taxable income.
Starting in 2019, No More Affordable Care Act Penalties
Beginning in the 2019 tax year, taxpayers will no longer be penalized for failing to have health insurance. Although the Affordable Care Act has not been repealed, the Tax Cuts and Jobs Act removed the individual mandate or as the Republicans refer to it: the “Obamacare penalty,” or the penalty for not having health insurance.
The penalty will not be eliminated until the 2019 tax year. Taxpayers must report health coverage for the 2018 tax year and will be subject to paying the penalty for not reporting health coverage.
A complete overview of the new tax reform and all the changes can be viewed on IRS.gov. You can also see an accountant, enrolled agent or tax preparer, and tax sites such as Turbo Tax that explain the new rules.