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.
When the changes go into effect
The new tax law known as the Tax Cuts and Jobs Act (TCJA) lowers individual tax rates (here is an outline of the new tax bracket system) and increases many tax deductions and credits available to many Americans. However, the next time you file your taxes, you will be doing so based on the current law, Grapeson M. Wilson, CPA, MBA, has clarified to Reader’s Digest. This can’t be emphasized enough because 78 percent of Americans polled by Liberty Tax were at least slightly concerned about tax reform affecting their 2017 tax return, according to Liberty’s Director of Compliance, Brian Ashcraft.
The standard deduction doubles
One of the fundamental principles of our tax system is that your “taxable income” is not your actual income but your actual income LESS either:
- a standard deduction
- the total of all of your itemized deductions
The standard deduction is a fixed amount, and the TCJA nearly doubles it, says Josh Zimmelman, owner of Westwood Tax & Consulting. That means you can deduct $12,000 right off the top of your actual income before you even begin computing your taxes. For married-filing-jointly taxpayers, it’s $24,000. Don’t miss these things your tax accountant isn’t telling you.
Figuring out your taxes could be simpler
Thanks to a higher standard deduction, you may not need to itemize—which is way more complicated. “It’s a win for simplicity,” notes Jason J. Howell, CFP. In addition, the TCJA reduces or eliminates some of the existing itemized deductions; it also allows for additional deductions to be taken by those who don’t itemize—you’ll learn more about this below. The net effect, according to Wilson, is some taxpayers will stop itemizing, and filing will be simple enough to do without an accountant.
Itemizing? Watch for the cap on state and local tax deductions
Currently, taxpayers who itemize their deductions can reduce taxable income by deducting the state and local income taxes (SALT) they pay (for example, real estate taxes). The SALT deduction still exists under TCJA, but only up to $5,000 for single filers and $10,000 for those married and filing jointly, according to Wilson.
There’s a new cap on mortgage interest deduction
This will be the last year itemizers can deduct mortgage debt interest up to $1,000,000, attorney Brian Pendergraft, tells Reader’s Digest. Under the TCJA, you’ll be capped at $750,000.
Here are surprising costs every new homeowner should know.
You won’t be able to deduct moving expenses
The current law allows itemizers to reduce your taxable income by deducting the cost of moving from one residence to another. Next year, this deduction will only be available to members of the military. (Even more reason to watch out for these moving scams).
You can no longer deduct bike-commuting expenses
The current law allows those who itemize their deductions to reduce their taxable income by deducting the cost of commuting by bicycle. That’s kind of a bummer considering all the health benefits of commuting by bike.
You won’t be able to deduct disaster costs
Itemizers who suffer losses as result of an uninsured disaster like a fire or flood can no longer recoup some of the expenses through tax deductions. One loophole: If the government officially deems the event a national disaster. Learn more about the law: these human rights still aren’t recognized everywhere.
No alimony deduction
The current law allows those who itemize their deductions to reduce their taxable income by deducting the cost of any alimony they pay to a former spouse. For couples who sign their divorce papers after December 31, 2018, this deduction will no longer be available under the TCJA.
You can’t deduct tax prep costs
Itemizers may want to fill out their own taxes next year: The cost of tax preparation is no longer be available under the TJCA. (Of course, if you opt for the standard deduction, you won’t need professional assistance.) If you still need help, check out these sources for free tax preparation.
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.
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!”
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.
Don’t miss these things single parents want you to know.
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.
The changes aren’t forever
The TJCA permanently lowers the corporate tax by 14 percent. But most of the TJCA’s provisions that apply to individuals are set to expire in 2025, if not sooner, Howell tells Reader’s Digest. For example, the deduction for medical expenses ends after 2019. And the repeal of the alimony deduction won’t apply until after 2018. So each year may be different from the next, and the next eight years may be different from the eight years afterward.
Please consult a professional
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.