Tax is a necessary but unpopular subject for most people. While most people are more than willing to pay tax, the tax system can seem daunting and hard to navigate, especially since it’s always changing. Just when you think you’re in the swing of things, the tax rules change again.
The 2018 tax reform bill, instituted by President Trump, was passed all the way back in late 2017. This new bill is called The Tax Cuts and Jobs Act, and under it many new rules will apply this tax season.
Although the bill was passed in late 2017, you’ll only see the effects of it in your income tax by this year. Overall the bill is meant to simplify and lower the tax you pay – of course, the efficacy of the bill in lowering your personal income taxes will, among other things, be determined by whether you know how the new system works to take advantage of the changes.
With income tax season upon us, learning about the recent tax changes is going to be an essential part of getting your tax done this year. Here’s what you’ll need to know to file your taxes in 2019.
Standard vs Itemized Deductions New Rules
In the past, itemized deductions were often the best way to go if you didn’t want to overpay on tax. However, in 2019 this probably won’t be the case. That’s because the amount for standard tax deductions is now approximately twice as much as it used to be.
If you’re a little confused as to what this means for you, let’s take a step back to distinguish between standard and itemized tax deductions.
Standard and itemized deductions are two different options that allow tax payers to reduce their amount of taxable income. As an overly basic example, if someone earns $24,000 annually and they are eligible for a tax deduction of $4000, they’re taxable income would be $20,000. So instead of being taxed on all their income, they’re being taxed as follows:
annual income – tax deduction = annual taxable income
There are two different ways in which tax payers can determine what tax deduction they’re eligible for:
- Standard tax deductions
- Itemized tax deductions
Standard tax deductions, as the name implies, is a standard or fixed amount that can be subtracted from your annual income to determine your taxable income. This amount is set by the government and will apply to every tax payer who chooses to make use of standard tax deductions.
The benefit of going with standard tax deductions is that it’s simple, less time-consuming and generally just a lot easier than itemized deductions. Although in some cases, especially before 2019, there was a good chance choosing standard tax deductions also meant you’d end up with a smaller tax deduction. This lead to a higher taxable income – so in the end, you’d be paying more tax.
Unlike standard tax deductions, itemized deductions can differ completely from one tax payer to another. Instead of paying a standard amount, you’ll need to keep track of all your tax deductible expenses in order to list them when you file your tax. If your tax deductible expenses add up to more than the standard tax deduction amount, then putting in the extra bookkeeping effort and tracking your tax deductible expenses will be well worthwhile.
Last year, approximately 70% of tax payers took the standard deduction route. This could be because tax payers found that the standard tax deduction allowed them to pay less tax. But it could also be an indication that most tax payers don’t want to keep track of tax deductible expenses.
The good news is that the 2019 Tax Reform Law will make it much less likely that tax payers will benefit from choosing to file tax with itemized deductions. This is because the standard tax deduction has been bumped up quite a bit. For comparison, here’s how much standard tax deductions have increased since 2017:
- For single filers the standard deduction goes from $6350 to $12,000
- For married couples filing jointly, the standard tax deduction goes up to $24,000 from $12,700 in previous years
- If you’re 65 or older, you can expect to add another $1300-$1600 onto your standard deduction, depending on whether you’re married
- For heads of households, the standard tax deduction is now $18,000
But while standard deductions have gone up, itemized deductions have gone down. This is because many expenses that were previously tax deductible are now limited for deductions.
Most notably, state and local taxes (called SALT for short) were seen as a tax deductible expense with no limit. This meant filers paying high taxes in their local state could file all of the taxes paid in the state or area where they lived as a tax deductible expense. Under the new tax rules, there’s a cap as to how much state and local taxes will be deductible, and that number is sitting on $10,000. Some examples of SALT taxes include:
- Property tax
- Local income tax
- Sales tax
The states that will be hit most hard by this new change will be the high tax states such as California, New Jersey, New York and Maryland. Florida, along a few other states, doesn’t currently have state taxes, so this change currently isn’t relevant locally. Many other states have some state-specific income tax, but this is limited to dividends and income from investments.
Lower Tax Across All Income Tax Brackets
The new tax bill will also reduce the percentage of tax all tax payers across different income brackets will need to pay. Many tax payers have already seen the change resulting from the lower tax to their monthly salaries, as a lower percentage of income is now deductible.
For the highest earners, 39.6% of income was deductible in previous years, whereas this year that number has reduced to 37%. Here’s how taxes are now reduced based on annual income:
- Single filers earning between $38,701 and $82,500 will pay will go down 3%
- Married tax payers filing jointly who earn between $77,401 and $165,000 also drops by 3%
Generally, this will lead to lower taxes for most households. However, it should be noted that you can no longer get personal exemptions, which could negatively affect some households.
Increase in Child Tax Credit
Child tax credit has been bumped up from $1000 to $2000 per qualifying child under the age of 17. Tax payers with higher incomes will now also be eligible for child tax credit.
Another benefit of the new tax bill is that tax payers will also be eligible for $500 tax credit for very other dependent they support. These dependents could include children over the age of 17, parents, siblings or even distant relatives. This will help tax payers who are supporting a large number of dependents to save quite a reasonable amount of tax.
Some other notable changes of the 2019 tax reform is a drop in corporate tax from 35% to 21%. Another change is that medical expenses will only be deductible if they exceed 7.5% of a tax payer’s adjusted gross income.
Get Professional Tax Advice
Navigating taxes for yourself and your business can be a difficult task. The current tax reform will be in practice from its inception in 2017 up until approximately 2025 for income tax. After this, the future of income tax is still uncertain, but there’s good possibility that things will change again.
If you’re a business owner, focusing on tax could cost you precious time you could be spending to build your business. Making use a professional accountant or bookkeeping firm can save you money, hassle and time on doing your tax, allowing you to focus on growing your business and income. Call Choice Accounting Solutions to learn more about how we can help you stay current with all your tax, without the need for you to waste time learning about new changes every tax season.