We’re just a few weeks into 2018 and there’s already a lot of changes happening. You may have actually noticed a difference in your paycheck already due to these new tax laws. Here’s a guide discussing the changes in the tax law that may impact your 2018 tax return. You’ll want to read this sooner rather than later, so that you know how each financial decision you make could potentially affect your tax return next year.
Standard Deduction and Personal Exemption
An increase in the standard deduction means a lot less people will be itemizing on their tax returns as this will prove to be the more beneficial method for many people. You may be hearing that the standard deduction nearly doubled across the board and while that is true, it’s important to note that along with the increased standard deduction is a loss of the personal exemption.
In addition to the $6,500 standard deduction a single tax filer would get, they would also have gotten a $4,150 personal exemption for 2018, making their total deduction $10,750 compared to the $12,000 now effective. As you can see, the $12,000 is still higher than the deduction a single tax filer WOULD have received, but not exactly double due to the loss of the personal exemption.
The change that is talked about most is the new tax brackets. Below is a chart of the tax brackets effective for 2018.
As a point of reference, below is the tax bracket that was originally planned to be effective for 2018.
As you can see, the highest tax bracket is now 37% compared with the previous 40%. Additionally if you are in the second lowest tax bracket, your tax rate went down 3%. These were the biggest changes in the tax brackets, whereas there were some shifts in the income levels for each bracket, as well as a small decrease in the tax rates for these brackets.
Another huge change due to the updates to the tax brackets is the marriage penalty is almost eliminated. The marriage penalty (not a true penalty, but just an unfortunate tax impact) would happen when two individuals got married and this put them into a different tax bracket than they were in when they were single. For example, two individuals that earned a taxable income of $90,000 per year would fall into the 25% bracket for singles under the old 2018 tax rates. However, if they were to get married, their combined income of $180,000 would push them into the 28% bracket. Under the new 2018 brackets, these individuals fall into the 24% marginal tax bracket, regardless of whether they got married or not. Essentially, the marriage penalty has been gone away for everyone except married couples earning more than $400,000.
Child Tax Credit
The Child Tax Credit, which is available for qualified children under age 17, has doubled from $1,000 to $2,000. Additionally the amount of the credit that is refundable has increased to $1,400. The phaseout threshold for the credit has also increased. The phaseout threshold for married filing joint has increased from $110,000 to $400,000 and for individuals it has increased from $75,000 to $200,000. If your children are 17 or older or you take care of elderly relatives, you can claim a nonrefundable $500 credit, subject to the same income thresholds.
529 Plans Usage
The new tax law expands the use of funds saved in a 529 college savings plan to include education other than college. These funds can now be used to pay for your child’s private school tuition and even tutoring for your child in the K-12 grade levels.
Alternative Minimum Tax
The alternative minimum tax (AMT) was established to ensure that high-income Americans paid their fair share of taxes, regardless of how many deductions they could claim. Essentially, higher-income households need to calculate their taxes under the standard tax system and under the AMT then pay whichever is higher.
The problem is that the AMT exemptions weren’t initially indexed for inflation, so the AMT started to affect to more and more people as time has gone on, rather than impacting just higher-income individuals. The new tax law permanently adjusts the AMT exemption amounts for inflation in order to address this problem, making them much higher in 2018 (see below).
Deductions Totally Lost
Here is a list of some of the deductions that will no longer be allowed as of 2018:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Other miscellaneous deductions previously subject to the 2% AGI cap
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
There you have it- some of the biggest and most impactful changes from the new 2018 tax laws. Use this information to guide you to make choices that will be beneficial to your 2018 tax return since it is still early in the year. Also, it’s important to note that most of the changes to individual taxes made by the new tax law are temporary and are set to expire after the 2025 tax year.