Major changes made to the federal tax law will directly impact many taxpayers in the upcoming filing season.
The Tax Cuts and Jobs Act was implemented at the beginning of 2018, and the major tax legislation will affect individuals and businesses that must file with the Internal Revenue Service before the filing date on April 15.
The most significant alterations for individual filers were made to the standard deduction amount, tax rates and what can and cannot be used for deductions.
The standard deduction amounts nearly doubled from $6,350 for single taxpayers in 2017 to $12,000 for 2018 taxes. Married couples filing jointly will see an increase from $12,700 to $24,000.
These increases mean that fewer people will itemize their return this year because it will take more deductible expenses to exceed the new threshold. Many itemized deductions have been eliminated, such as deductions for employee business expenses; tax preparation fees; investment expenses, including investment management fees; employment related educational expenses; and job search expenses. Moving expenses are no longer deductible.
“The changes are so complex,” said Larry Schwartz, who runs File Your Income Taxes (Free), an area program for households with income less than $60,000.
In previous tax years, the standard deduction was always coupled with the personal exemption deduction, but under the new law the personal exemption has now been eliminated along with the dependent exemption. The two were increased to $4,150 for last year’s taxes.
Tax rates were lowered almost across the board. The lowest bracket remained the same 10 percent tax, but the new threshold was increased to $9,525 for single taxpayers and $19,050 for married couples filing jointly. The next bracket was dropped from 15 percent to 12, while the threshold was raised by $750 for single ($38,700) and $1,500 ($77,400) for married.
The next bracket’s tax rate decreases to 22 percent. While the threshold for single payers also decreases to $82,500, the married filers are given an increase to $165,000.
Good news for parents is that the Child Tax Credit has doubled from $1,000 per child to $2,000. In addition, the amount that is refundable has grown from $1,100 to $1,400. A new credit of up to $500 may be available for each dependent who does not qualify for the child tax credit.
“People with children will find themselves better off,” said Carol Romeril, owner of Romeril Tax & Accounting in New Ipswich.
The changes limit the amount of state and local property, income, and sales taxes that can be deducted to $10,000. In the past, these taxes have generally been fully tax deductible.
Filers will notice that the look and size of the 1040 tax return has drastically changed. What used to be covered on two pages is now spread over seven half pages.
“It was done to make it look simpler, but is it really?” Schwartz asked during a recent presentation about the Peterborough Town Library.
For those who own their own business, the rate at which C Corporations are taxed has gone to a flat rate of 21 percent, which benefits large corporations as it brought down the taxed rate, but is actually an increase for those who have profit margins less than $50,000, Romeril said. Those corporations would be taxed at a rate of 15 percent last year, and Romeril said that those companies may want to look into changing their status.
A change to the business tax code occurs in section 199, which provides for a new deduction – referred to as Qualified Business Income Deduction – allowing them to deduct up to 20 percent of their qualified business income.
“It’s the most complex change to the tax code for businesses,” Romeril said. “There were a lot of changes that affect small business owners.”
The change applies to all taxpayers, except corporations.
“It definitely does benefit the individual, but it takes a little bit of work, a little bit of knowledge to get it right,” Romeril said.
There have been question as to how it pertains to rental properties, something the IRS worked to clarify as late as last week.
Romeril said the idea behind the updated tax law was to make it easier for people to file their own taxes, but all the changes along with the form redos will make things difficult during the first year – even for the tax professionals.
“The one thing I would have liked is if they had not changed all the forms this year as well,” Romeril said. “Pushed those changes off a year.”
Schwartz’s program is held weekly or biweekly at The Grapevine in Antrim, Scott Farrar in Peterborough and Reality Check in Jaffrey. Call those individual locations to set up an appointment.