New Tax Law 101
Kelsey McArdle /RD.Com, Shutterstock The TCJA was enacted to deliver "tax relief to Americans," according to a statement made by House Ways and Means Committee Chairman Kevin Brady upon introducing the law. Technically, however, the TCJA doesn't provide for new tax deductions (a tax deduction lowers your taxable income), Jason J. Howell, CFP explained to Reader's Digest. Rather, it mostly accomplishes these three changes: It increases certain tax deductions and credits (which reduce your tax bill after your tax rate's been applied to your taxable income), makes the deductions available to more Americans, and generally lowers tax rates. And while you'll notice that your paycheck tax withholdings will drop in 2018, most of the following tax changes won't affect your filings for April 15, 2018. The true impact of the TCJA will kick in when you file your taxes in 2019.
Check out these things IRS agents won't tell you about taxes.
Your tax rate may be lower
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The TCJA lowers the tax rate and raises the threshold amount you have to earn before being pushed into the next higher tax bracket. Check out the changes for married taxpayers who are filing jointly below; check here for single taxpayers, married filing separately, and other statuses.
- If your taxable income is $19,050 or less (up from $18,650), your tax rate will still be 10 percent.
- $19,051 to $77,400 (up from $75,900): Your tax rate will be 12 percent (3 percent decrease).
- $77,401 to $165,000 (up from $153,100): Your tax rate will be 22 percent (3 percent decrease).
- $165,001 to $315,000 (up from $233,350): Your tax rate will be 24 percent (4 percent decrease).
- $315,001 to $400,000 (down from $416,700): Your tax rate will be 32 percent (1 percent decrease).
- $400,001 to $600,000, (up from $470,700): Your tax rate remains 35 percent.
- More than $600,000: Your rate will be 37 percent (2.6 percent decrease).
You'll be able to take a much higher "standard deduction"
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Your actual income is not your "taxable income." Rather, it's reduced by either a "standard deduction" or "itemized deductions" to equal "taxable income," explains Grapeson M. Wilson, CPA, MBA. The standard deduction is a fixed amount, which the TCJA increases from $6,350 to $12,000 for single taxpayers (and from $12,700 to $24,000 for taxpayers who are married and filing jointly), explains Josh Zimmelman, owner of Westwood Tax & Consulting. Many will now prefer the standard deduction to itemizing (which involves sorting through what is tax deductible and whether you qualify).
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You can deduct small business expenses even if you don't itemize
Kelsey McArdle /RD.Com, ShutterstockThe TCJA permits individual taxpayers to deduct up to 20 percent of their income from small business activities, says New York tax attorney, Matthew T. Eyet, Esq. JD, LLM, although the specifics are "complex," he notes, "and subject to income limitations." Nevertheless, "most small business owners, independent contractors, and real estate investors will be able to take advantage of the new deduction." And it's available even for taxpayers who opt not to itemize deductions, according to Wilson.
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If you're a teacher, you can still deduct teaching expenses
Kelsey McArdle /RD.Com, ShutterstockUnder the TCJA, teachers can deduct up to $250 for the unreimbursed cost of purchasing classroom supplies, Joshua Hanover, EA, senior manager at Marks Paneth LLP tells Reader's Digest. "Teachers are constantly giving, and this is a chance for the Internal Revenue Service to give back!" And this deduction applies even to teachers who take the standard deduction (and don't itemize).
You may be eligible for a much higher child tax credit
Kelsey McArdle /RD.Com, ShutterstockExisting law allows taxpayers who earn under up to $110,000 to decrease their tax bill by $1,000 for each child under age 17. The TCJA doubles the credit to $2,000 per child and allows couples making up to $400,000 to claim it, according to Zimmelman. As an added bonus, the first $1,400 is "refundable," meaning that if it reduces a taxpayer's tax bill below zero, the taxpayer is entitled to an actual refund from the government, Howell adds.
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You may be eligible for a new tax credit for other family members
Kelsey McArdle /RD.Com, ShutterstockThe TCJA also allows taxpayers a $500 credit for "other qualifying dependents," Clarence Kehoe, partner and leader of the Tax Department at Anchin, Block and Anchin, tells Reader's Digest. "Other qualifying dependents" include older adults (for example, elderly parents) who live in a taxpayer's home, as well children ages 17 and over. This credit is not refundable.
You can use pre-tax dollars to pay for private school
Kelsey McArdle /RD.Com, ShutterstockA "529 plan" has traditionally referred to a college savings plan, the earnings of which are tax-deferred, and distributions from which are income-tax-free. Under the TCJA, taxpayers can use their 529 plans to pay for private elementary school, secondary school, and even homeschooling, according to Brian Ashcraft, director of compliance at Liberty Tax.
This is the smartest way to spend your tax refund.
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If you inherit money, you probably won't have to pay taxes on it
Kelsey McArdle /RD.Com, ShutterstockUnder existing law, when you inherit money, you don't have to pay taxes on the first $5.49 million, but under the TCJA, that number rises to $11.2 million for individual taxpayers ($22.4 million for married couples filing jointly) according to Zimmelman.
New deductions for those who itemize
Kelsey McArdle/RD.Com, ShutterstockFor those who do choose to itemize their deductions, the TCJA allows deductions of:
- Medical expenses exceeding 7.5 percent of taxable income (down from 10 percent); as an added bonus, this will apply to 2017 medical expenses, Howell tells us (although this deduction will expire at the end of 2018).
- Charitable expenses of up to 60 percent of taxable income—up from 50 percent, according to CPA and author, Tom Wheelwright. But please note that you can't use this deduction to buy seats at college sporting events, warns Kehoe.
- The cost of all new and used business equipment (including HVAC and alarms for rental properties) and all research and development expenses used in a business, according to Wheelwright.
You'll want to consult a professional
Kelsey McArdle /RD.Com, ShutterstockMany of these new provisions are set to expire in 2025, Howell tells us, and some expire even sooner. "So planning for the next eight years may be different from the eight years afterward." Also, please note that when you file your 2017 taxes, you will be doing so based on the current tax law and not the TCJA, notes Wilson. Finally, remember that this article isn't intended as tax advice, but rather as a summary of the changes under the new law. Financial planning and tax decisions should be made based on a thorough reading of the TCJA or consultation with a professional.
But note: There are some things your accountant won't necessarily tell you.