Like it or not, tax season is underway. On top of the usual flood of paperwork, you have to navigate a slew of new tax laws. It’s the biggest overhaul our country has seen in thirty years, so if you are feeling overwhelmed, you aren’t alone. Before diving headfirst into tax prep, it may help to learn about some of the biggest changes you will encounter. Here’s a breakdown of what you can expect.
Expect your tax bracket and exemptions to be different
One of the biggest changes you will notice is
the individual tax brackets. For the 2018 tax season, these range from 10 to 37
percent, depending on your income and filing status.
If you aren’t sure where you fall, don’t bother sifting through pages of the tax code. The Tax Foundation has an easy-to-follow chart, and if you are curious about 2019, you can see those tax brackets here.
Another major change: the Tax Cut and Jobs Act (TCJA) temporarily ditched personal and dependent exemptions. Before 2018, you could get exemptions for yourself, your kids, and spouse, and they acted like deductions by slashing your final bill.
There’s a much larger standard deduction
Most folks love seeing their tax bill go down.
Deductions are one way to make that happen. Each year, the IRS lets you pick
between a larger “standard deduction” or smaller “itemized
deductions” added up to reduce your bill.
Now, thanks to the TCJA, the standard deduction is twice as large — $12,200 for individuals and $24,000 for married couples. So, how will this impact your taxes? Well, it depends.
Things like mortgage interest and charitable
gifts fall into the itemized deductions category. Because the standard
deduction is so much higher, it’s likely you will pick that over your total
You can estimate how this change may impact you through a tool like TurboTax’s TaxCaster. If you are still feeling confused by your options, don’t be afraid to work with a local tax professional.
You may snag a bigger tax credit for childcare
If you are raising children, losing the dependent exemption is a major bummer. The childcare tax credit doesn’t make up for the reduction, but it does offer some relief. You may be eligible for a $2,000 tax credit for each dependent under 17. That’s $1,000 more than before. To qualify, they must live with you for at least six months every year.
Note: You may still be eligible for the child and dependent care tax credit too. The complete rules and requirements for that credit are listed here.
Lower taxes for your business
If you are self-employed or have a side hustle, you may be eligible for a new 20 percent deduction. This savings applies to pass-through businesses — like sole proprietorships or partnerships. But there are some restrictions based on your industry and income level. If you aren’t sure if you qualify, it’s better to err on the side of caution by checking with a tax professional.
Start preparing to file your taxes now
The TCJA has already caused a lot of confusion. By knowing about the major changes, you are already one step ahead of most folks. The recent shutdown and changes may slow down the process, so your best line of defense is getting organized now. If it feels like too much to tackle on your own, hire a professional — as soon as possible. The longer you wait, the more difficult it may be.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.