22 Things Tax Experts Wish You Knew About the New Tax Law
As of January 1, 2018, the much-talked-about Tax Cuts and Jobs Act (TCJA) went into effect. Here’s what the tax experts say you need to know.
Give more to charity!
Under the TCJA, taxpayers who still choose to itemize can reduce their taxable income by deducting their charitable expenses—up to 60 percent of taxable income (it was 50 percent), according to CPA and author, Tom Wheelwright. But please note, however, that you can’t use this deduction to buy seats at college sporting events, according to Clarence Kehoe, partner and leader of the Tax Department at Anchin, Block and Anchin.
New business deductions
Wheelwright explains to Reader’s Digest that taxpayers who still choose to itemize can reduce their taxable income by deducting the cost of all new and used business equipment (including HVAC and alarms for rental properties). Business owners can also deduct all research and development expenses.
New “pass-through” deduction—even if you don’t itemize
The TCJA also provides a new deduction for all taxpayers, whether or not they itemize. The TCJA will permit 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: “They’re subject to income limitations. However, 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.
Here’s why you should embrace Small Business Saturday.
Teachers can deduct teaching expenses
And they don’t have to itemize! Under the TCJA, teachers will be allowed deduct up to $250 (for married teachers filing jointly, it’s $500) 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!”
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Child tax credit increases
More good news, whether you plan to itemize your tax deductions or not: If you earn less than $400,000, you can cut your tax bill by $2,000 for each child under age 17, according to Zimmelman. (The current law stipulates you make less than $110,000 and limits the credit to $1,000.) As an added bonus, the first $1,400 is “refundable,” meaning that if it takes a taxpayer’s tax bill below zero, the taxpayer is entitled to a refund, Howell adds.
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Tax credit increase: other family members credit
Regardless of whether you take the standard deduction or itemize, the TCJA will allow you a $500 credit for “other qualifying dependents,” explains Kehoe. This could apply to elderly parents who live in a taxpayer’s home, for example, as well children ages 17 and over. This credit is not refundable.
New uses for your 529 plan
Not all the TCJA’s changes are specifically about reducing your tax rate. For example, the TCJA will allow new uses for tax-deferred education savings plans. Specifically, taxpayers will be permitted to use their 529 plans to pay for elementary school, secondary school, and even homeschooling, according to Ashcraft. (Under the current law, the plan could only be used for college.)
Decrease in inheritance taxes
When you inherit money from someone who has died, under existing law, the first $5.49 million is exempt from taxes; if you’re a married couple filing jointly, the first $10.98 million is exempt. Under the TCJA, the amount has doubled to $11.2 million for individual taxpayers and $22.4 million for married couples filing jointly, according to Zimmelman.
No more mandatory healthcare
Although the TCJA does not repeal the Affordable Care Act, it does eliminate fines for failing to enroll in a health care plan starting in 2019. Here are the secrets your health insurance company is keeping from you.
You can deduct more medical expenses
Under the current law, taxpayers who itemize can deduct their medical expenses that exceed 10 percent of their taxable income. Under TCJA, you can start deducting medical expenses at 7.5 percent of taxable income, but only in 2017 and 2018. And yes, that means you can enjoy this benefit when you file your 2017 taxes. This new deduction level ends on January 1, 2019.
Here are some other new deductions available under the TCJA for those who itemize.