What will the new tax laws do to your bank account?
Set to go into effect for the 2018 tax year, the impact of the new Tax Cuts and Jobs law is as individual as a wage earner’s bank statement
Lower tax rates overall, fewer tax brackets to contend with and a filing process made simpler are hallmarks of the new tax law.
But what’s here today could be gone tomorrow.
“These are temporary impacts. … The majority of the provisions sunset on Dec. 31, 2025,” said Ruthann Woll, a Certified Public Accountant and principal of RKL LLP’s tax services group in Spring Township.
In fact, Woll said Tax Code changes aren’t that unusual, which gives “subsequent administrations [an] opportunity to change things.”
Among notable changes are the standard deduction and higher threshold to itemize – these two changes aim to simplify filing for most taxpayers by streamlining the filing process.
For 2018, the standard deduction for individuals jumps to $12,000, and it’s $24,000 for married couples filing jointly. The head of household standard deduction rises to $18,000.
“Unless you exceed the standard deduction allowances, you can’t itemize. And, even if you can, it may not make sense to,” said Paul Marrella, managing partner of Marrella Financial Group LLC, Raymond James Financial Services Inc., in Wyomissing.
Single filers who are 65 and older those who are blind receive an additional $1,600 standard deduction, but not twice. Married couples filing jointly receive an additional $1,300 standard deduction for each person who qualifies.
PERSONAL EXEMPTION ENDS
The personal exemption has gone away. Filers no longer can take the $4,050 personal exemption for themselves, a spouse or dependent children.
Charitable deductions are gone, unless you itemize.
So, if you are you generous to favored charities but now can’t itemize, those deductions disappear.
“The charitable deduction has not changed, but the threshold has because the standard deduction has increased,” Woll said.
Woll said charities generally are concerned because the small donor, now unable to write off a donation, may not give at all.
MORTGAGE INTEREST IN DOUBT
Mortgage interest is another popular itemized deduction that may go away for some borrowers.
“Even though the standard deduction is high for a lot of people, that is going to have a meaningful effect,” Marrella said.
Mortgage interest as a write-off remains in flux, Woll said.
“They are still working that out because the IRS said it would allow it, but differently,” she said of the Internal Revenue Service. “You have to rethink how you use your loans.”
According to Jane Spradlin, a shareholder at Concannon Miller & Co. in Hanover Township, Northampton County, home equity interest write-offs are “gone.”
Educational savings disbursements have changed.
Changes to 529 plans traditionally used for college savings will now allow distributions for educational expenses in grades kindergarten through 12 for private and religious schools, Woll said.
Do you itemize medical and dental expenses? Under the new law, you can only deduct expenses more than 7.5 percent of your adjusted gross income, only if you qualify to itemize and only for 2018.
“In 2019, it goes back to 10 percent,” Spradlin said.
Those who are employed, or belong to unions, may no longer deduct job-related expenses that are not reimbursed for such things as clothing (uniforms, tools and trades gear) or unreimbursed travel and mileage.
Job-related expenses for those who are self-employed have not changed.
So, whether or not your wallet expands or contracts will depend upon your personal financial situation.
The state, local and property maximum deduction, if you itemize, is now $10,000. This could hurt people with high property taxes, including those who live in school districts with high tax rates, according to Spradlin.
DEDUCTIONS VS. CREDITS
The alternative minimum tax has been changed, not eliminated. It may apply to some high wage earners, trusts, estates and corporations.
“A lot of people won’t be filing AMT, because they won’t fall under it,” Spradlin said.
Spradlin cautioned against confusing tax deductions with tax credits.
“Tax credits provide a dollar-for-dollar reduction [in tax liability],” she said. A tax deduction, though, lowers the amount of income on which your tax rate is based.
“The child tax credit, for dependent children 17 or under, was doubled to $2,000,” Spradlin said.