It's tax time again — but it's going to be a bit different this year, thanks to the 2018 tax reform bill. Some of the elements you've gotten used to on your tax return have changed, and you may have some new deductions available to you as well. The really good news? Filing your 2018 tax return is likely to be a bit simpler.
The standard deduction for 2018 is almost double what it was in 2017. If you don't itemize your deductions, this is good news for you. The standard deduction reduces your adjusted gross income (AGI). The lower your AGI, the lower your taxes will be. You still have the option of itemizing deductions, of course. It can be a bit of a hassle to do, but it's worth it if your itemized deductions exceed the standard deduction amount.
In past years, you could subtract a certain amount from your income right off the top. For instance, in 2017, you could deduct $4,100 from your income before performing any other tax calculations — and that was just for yourself. You could also deduct $4,100 for your spouse and another $4,100 for each dependent. If you have a big family, that could be a significant number. That's completely gone this year. In 2017, if you made $60,000 and had a family of 4, you subtracted $16,400 in personal exemptions at the top of your tax return, so your taxable income was only $43,600. In 2018, all $60,000 is now taxable.
A tax credit is different from a tax deduction. Deductions reduce your taxable income. Credits, on the other hand, reduce the amount of the actual tax you pay. There's a little bit of good news for parents who pay for childcare this year. In 2017, your tax bill was lowered by up to $1,000 to reimburse you for child care expenses. This year, the figure is $2,000. Even if you don't pay any tax, you might be able to get a refund of up to $1,400 with this new provision.
There are still seven tax brackets for your 2018 taxes, but the tax rates for each bracket have lowered significantly. Also, income thresholds are higher. What does that mean? The higher tax brackets apply to very few taxpayers. In 2017, you hit the top tax rate of 39.6% with an AGI of $480,050 (assuming you're married, filing jointly). Now that bracket only applies to those with $600,000 in taxable income, and the top tax rate is lower, at 37%.
Yes, you can still deduct the mortgage interest you're paying — but not as much as you may have in the past. In 2017, you could deduct interest on a $1 million mortgage on your principal residence. This year, that mortgage size is lowered to $750,000, though you could be grandfathered in with an older mortgage. If you've been deducting interest on a home equity loan, check how you spent that money. If you used it to improve your home (and you have receipts), it's still deductible. If you used it for any other reason, such as medical bills or college tuition, it's no longer deductible.
Traditionally, you could deduct from your federal taxes all the taxes you paid to your state, including property taxes, income taxes, and even sales taxes. Beginning in 2018, however, those deductions are capped at $10,000. Residents of some states may find this makes no difference in their overall tax bill. However, those in higher-tax states — think California, New Jersey, or New York — may feel the impact.
If you're the kind of person who gives away a large part of your income, first: what a great person you are! You'll get a bit more recognition with the 2018 tax changes. You can now deduct up to 60% of your AGI, an increase from the 50% maximum of past years. However, if you make a "donation" to your favorite university to get sports tickets, be aware that the deduction you've taken in the past no longer exists.
If you've itemized deductions in the past, pay attention to these changes, since some of your deductions may no longer exist. Some apply to taxpayers who don't itemize, as well. You can no longer deduct job-related moving expenses if you're not active-duty military, or casualty and theft losses (other than those resulting from a federally declared disaster), tax preparation expenses, unreimbursed employee expenses, and many others. Compare your 2017 tax return to 2018 to see all the differences.
We're talking about the estate tax. Up until last year, if you inherited more than $5.49 million, anything over that amount was taxed at 40%. Now you can inherit $11.2 million before you get hit with that tax rate. So tell those rich relatives to go ahead and write you into their wills.
The IRS offers free tax software for preparing and filing your taxes. If your income is less than $66,000, the software will handle your state taxes, too. Check out the free tax filing options available from TurboTax and H&R Block, as well. They all handle the new 1040 form (1040EZ no longer exists), plus a few of the basic forms. These free choices are a great option if you report all your income with W-2s and don't itemize deductions.
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