As you may already know, President Trump signed the new tax bill into law on December 22nd, 2017. Many of the changes don't go into effect until you file tax year 2018 (which we'll file in 2019). Here are some of the most important changes that will affect you and your family.
Lower Tax Brackets
One of the first changes that I'm sure we would all put in the "Good" category is the new lower tax brackets. The tax rates have all gone down from earlier years to the now 10%, 12%, 22%, 24%, 32%, 35% and 37%. This change (which may seem small at first glance) will actually make a big difference for millions of taxpayers.
Child Tax Credit Increase
Next on our good list is the increase of the Child tax credit. Taxpayers can now claim $2,000 per child under the age of 17, which is double the previous $1,000 credit in the past. However, only $1,400 of the credit is refundable, meaning you'll only get an additional $400 per child if you have a refund due. Families and individuals with three children can expect an extra $1,200 more on their refund this coming season. That's pretty awesome.
New $500 Credit for "Other" Dependents
Here's something to make you smile. Under the new tax law, taxpayers can now claim a $500 credit on "other dependents" which are basically any dependents that are not your children. That means you can now claim $500 for parents living in your home, older siblings and in some cases even "Freeloaders" sitting on your couch. Are you smiling yet? One caveat to throw in however is that this new credit requires you to enter the person's social security number to claim it, so don't go trying to claim your pet dog now.
Standard Deduction Increase
The last item on our "Good" list is the increase of the standard deduction. Single taxpayers who claim the standard deduction will see it jump from the old $6,350 deduction in past years to a $12,000 deduction this coming season. Married couples will see it go up from $12,700 to $24,000 if they file jointly. Not too shabby.
Personal & Dependent Exemptions Are Gone
One of the first major negative impacts of the new tax law is the elimination of the personal and dependent exemptions. In the past, taxpayers have been able to claim an exemption of $4,050 for themselves (if no one can claim them as a dependent), the same for their spouse and an additional $4,050 for each of their dependents. Those days are gone. So now, a married couple with three children can no longer take advantage of a $20,250 exemption from their income.
Many Deductions Are Eliminated
Some of the deductions that many taxpayers were able to claim in past years have also been eliminated. This will affect millions of taxpayers who itemize deductions every year. Some of these eliminated deductions include:
- Moving Expenses: If you've moved for work or in order to obtain a better job, you can no longer claim your moving expenses and/or miles etc. as a deduction unless you are in the military and on active duty.
- Personal Casualty & Theft Loss: You can no longer claim any deductions for a loss incurred due to a storm, fire, theft or any other casualty. Now, the loss must come only due to a Federal Disaster.
- Miscellaneous Deductions: All miscellaneous deductions subject to the 2% rule have also been eliminated. Some of these include investment expenses and unreimbursed job expenses such as tools, uniform expenses, miles and more.
State & Local Tax Deduction Decrease
In the past, all state and local taxed were fully deductible no matter what the amount. Under the new law, the IRS will limit the amount of these deductions to a maximum of $10,000.
No More Deduction for Alimony
The first tax law change on our "Ugly" list has got to be the removal of the Alimony deduction. In the past, divorced taxpayers could deduct alimony payments and those payments were included as income on the receiving taxpayers return. Under the new tax law, one can no longer deduct any payments for alimony and those same payments will no longer be included as income on the receiving taxpayers return. For the taxpayer receiving the alimony this will be pretty sweet. However, for the individual making the payments yet losing the deduction.... it's not too pretty.
IRS Statute Of Limitations for Audits
The final item on the ugly list is not a change that has come due to the new tax reform but it is a very important yet overlooked change nonetheless. The Internal Revenue Service previously had three years to audit an individual's tax return and assess additional taxes and fees. It is important to know that now, the IRS can go back six years and in some cases even further. This means that now more than ever, taxpayers should be extremely diligent in keeping records and working with an experienced tax professional when filing their upcoming tax return.
The new tax law will have a huge impact on the lives of millions of taxpayers as well as the local and national economy. Working with a knowledgeable and experienced tax professional will go a long way to making that impact a benefit as opposed to an encumbrance.
Written By: Stevens Ewald 10/14/2018, Executive tax preparer for 5 Star Tax Inc.