It’s been six months now since the IRS gave out raises, have you been enjoying yours? Back in February the IRS adjusted the tax withholding tables to take out less federal income tax based on anticipated savings under the Tax Cuts and Jobs Act. That’s nice to give out the savings in advance, but the trouble with standard tax tables is that they’re standard. Definitely not scientific, but in almost every case I’ve seen the amount that tax withholding went down exceeded the amount of extra tax savings. For the unprepared that’s going to be an unpleasant tax filing experience next spring, with a smaller refund or maybe a balance due.
The changes to the tax code this year are quite comprehensive, and while some returns will be simpler, others become more complex not just in preparing the return but in planning for tax savings.
First the simple part- the standard deduction increased to $12,000 for single filers, $18,000 for head of household, and $24,000 for married filing jointly. In addition, the combined deduction for state and local income taxes and real estate taxes is limited to $10,000. That means a lot more taxpayers will be taking the standard deduction and find their record keeping burden much lighter.
On the other hand, the personal exemption has been eliminated completely. So a married couple filing in 2017 with three kids using the standard deduction along with the exemption amounts would get to reduce their taxable income by $32,950 vs $24,000 in 2018. But while taxable income is higher, the tax rates are lower and in most cases more than makes up the difference, resulting in lower taxes.
Imagine instead though, that this couple usually itemizes deductions, and between taxes, mortgage interest, and donations ends up around $24,000 each year in deductions. They’ll likely take the standard deduction for 2018, but since the standard isn’t any more than what they itemized in the past, they’re taxable income will go up by the $20,250 in five personal exemptions that they lose. That’s not likely to save them much tax and might end up costing more.
However, having the three kids doesn’t leave you flat broke (tax-wise at least). The child tax credit for dependent children under 17 was doubled to $2,000 per child and the income limit where the credit begins to phase out increased for joint filers from $110,000 to $400,000. That’s potentially a huge savings for families in that income range. Also, the law created a new non-child dependent credit of $500, which would apply to other dependents such as college age kids or dependent parents. Under prior dependency rules, a dependent only qualifies if his or her
income is less than the personal exemption amount. Since there isn’t one any longer, it is unclear how much income if any a dependent can have.
Talk of all of the tax changes in the Tax Cuts and Jobs Act would quite literally fill hundreds of pages, but I’ll stick to just a few more posts on the most relevant parts. But if you haven’t already checked out your tax situation under the new law, you might want to invest in a planning session before the year gets too far away from you to prepare for a potentially smaller refund or tax due.