Taxes can be confusing to many. The new tax reform plan passed by Congress and signed by President Donald Trump has some wondering what they need to do this year to make sure they take advantage of all the tax breaks possible. First, a bit of bad news. Most of the tax breaks won’t officially take effect until you file your 2018 taxes. The only break anyone will see in the next couple of months will be in paychecks for those who work W-2 jobs. The Internal Revenue Service is expected to release new withholding tables in the next few weeks. Be patient. Small employers may take a little bit longer to make the adjustments to paychecks. But you can expect to see some additional dollars this year.
Your biggest savings will come when you file your 2018 taxes. The tax breaks will mostly affect the “middle class,” which includes most Americans. According to online research firm Statista, only 27.7% of American households bring in more than $100,000 a year. Another bit of bad news—many of the tax cuts expire in 2025. Here’s a breakdown of some of the plan’s biggest impacts for 2018.
The standard deduction and child credit
According to the Joint Committee on Taxation, about 70% of taxpayers take the standard deduction, which would have been about $13,000 for a married couple filing jointly in 2018 before the tax plan passed. The new standard deduction is $24,000, nearly double. Single taxpayers, married filing separately, and those filing head of household saw similar jumps in the standard deduction. The committee is now predicting about 94% of taxpayers will forgo the hassle of itemizing and just take the standard deduction. The increase in the standard deduction is important since the personal deduction goes away in 2018.
Parents will also see an increase in the Child Tax Credit from $1,000 to $2,000. And if you have a child over the age of 17 that is still living at home, you can take a $500 credit. This credit also applies to families taking care of elderly parents or relatives. Parents can also use their 529 savings plan for other expenses such as private school or tutoring for children in kindergarten through the 12th grade. The savings plan was previously only for college-related expenses.
Some deductions will be eliminated in 2018 and this will provide another reason for taxpayers not to itemize. Moving expenses, tax preparation expenses and unreimbursed employee expenses are some of the items that are no longer deductible. Alimony payments are also no longer deductible. For homeowners, the biggest change is the removal of the deduction of interest for home equity loans.
Opponents of the plan noted the tax break given to corporations. The corporate tax rate was reduced from 21% to 35%. Many corporations, including AT&T and Fifth Third Bancorp, are offering bonuses to some of their employees because of the reduction in corporate tax.
The tax plan also gives self-employed people, who usually pay a lot more taxes than those who work W-2 jobs, a big break. Self-employed people also pay their own Social Security and Medicare fees, along with their taxes. The new bill will allow those who are self-employed to deduct 20% of their income. This “pass-through” tax break includes sole proprietorships, LLCs, partnerships, and S corporations. The tax break is capped at for those who provide professional services such as doctors and attorneys. The cap is $157,000 for single filers and $315,000 for married filers.
Health insurance penalty
A lot of attention has been given to the elimination of the individual health insurance mandate required as part of Obamacare. This does not take effect until 2019 so you will need to provide proof of your healthcare coverage in 2018 or pay a penalty.
In closing, do your homework and consult with an accountant or tax preparer if you are confused. It’s better to get it right the first time and not have the IRS penalizing you later.