You’ve probably heard about the changes to the tax law that will take effect when you file this year, and your head may be spinning.
Don’t worry – today I’m going to give you an update and try and simplify it for you. Even though the tax bill brought some really big changes, in a lot of ways it simplified many things. We love when things are simple.
I dove deep into the new tax reform details when I took Personal Income Tax Accounting in the fall of 2018. I feel qualified to discuss taxes because few people have studied the changes. I will shed some light on things that could help you.
I also sat down with my professor, Kirsten Cook at Texas Tech University, who has a Ph.D. in Accounting and is a CPA and got his input on the biggest tax changes.
I’m not a CPA, nor do I plan to become one. Don’t take what I say as tax advice. This post is intended for educational purposes only. It’s good to have a general idea of the changes that are coming and how it will impact your personal finances. If you have specific questions related to your situation, consult a tax professional.
What are the biggest changes that will affect the amount you pay in taxes this year?
Tax Rates and Brackets
One of the biggest changes in 2018 is the income brackets and marginal tax rates. A marginal tax rate is simply the percentage of your income that you pay taxes on the more you earn. Depending on how much you make, your income is taxed at many different rates, not just one.
You can figure out your marginal tax rate by viewing the charts below and finding out which tax bracket you fall into.
For example, if a married couple made $98,000 filing jointly in 2018, how much will they pay in taxes? They’d fall in the 22% tax bracket. But that doesn’t mean they’re going to pay a flat tax of 22%. They pay 10% on the first $19,050 ($1,905), 12% on the next $58,350 ($7,002), and finally 22% on the last $20,600 ($4,532).
The total amount of taxes paid on $98,000 is $13,439 in this case. Compare that with 2017 ($15,977) and they have direct savings of $2,538. This is money that would have otherwise been paid to the government, but because of the changes, it stays in their pocket.
Lower marginal tax rates mean you can pocket more money from your paycheck!
2017 Marginal Income Tax Rates and Brackets
Compare these to 2018 numbers.
2018 Marginal Income Tax Rates and Brackets
Changes to the Standard Deduction
Another big change to the 2018 tax reform bill was the standard deduction. They’ve nearly doubled!
A standard deduction is an automatic deduction in what you owe in taxes. You don’t have to take the standard deduction though. You could potentially deduct your taxes more if you itemize. This simply means taking all of your qualified expenses and adding them up. This is more of a hassle and it’s estimated that the number of people who are itemizing is going to drop by 56%.
Here’s a quick look at a comparison of the standard deduction last year to this year:
From the chart above it clearly looks like you’re going to be saving a lot more money in taxes in 2018. But keep in mind that the changes got rid of the personal exemption, the amount deducted from taxable income for individual taxpayers and any dependents claimed on their tax return.
Going off of our example of the married couple who made $98,000 in 2017, the personal exemption was $4,050 per dependent. So a married couple with no dependents would receive a standard deduction of $12,700 and personal exemptions of $8,100 leaving them with a taxable income of $77,200 ($98,000 – $20,800 = $77,200).
In 2018, the same couple would have a standard deduction of $24,000 with no personal exemptions leaving them with a taxable income of $74,000. So it’s a savings of $3,200, not the $11,300 that you would think looking at the graph.
The government simplified this portion of taxes, which we like!
“The increase in the standard deduction makes up for the elimination of personal exemptions, leaving most Americans with quite a bit more money in their pockets.” – Dave Ramsey
Child Tax Credit
Children. It makes no economic sense to have them, almost nothing requires more time and effort, we don’t get paid to raise them, in fact, we have to pay to raise them, and yet the population continues to grow. Thanks to the changes in the Child Tax Credit, raising little ones in 2018 and beyond makes more financial cents!
In 2017, in order to qualify for the Child Tax Credit parents had to make no more than $110,000 jointly or $75,000 individually in order to qualify for the $1,000 tax credit per child. In 2018, these limits have increased to $400,000 jointly and $200,000 individually and the Child Tax Credit has doubled to $2,000 per child. Is having kids sounding a little more doable!?
Speaking of children, if you have a 529 college savings plan up until now it could only be used for qualifying college expenses. Now, you can use it for education other than college. For example, private school, tutoring, etc.
Entertainment is no longer a business deduction
That’s right, under the new tax law, businesses can’t deduct most entertainment expenses anymore. 🙁
Estate Tax Exemption
The estate tax is money you pay on inherited money and property. In the past, there was a 40% tax rate on money and property received over $5.49 million. Now, you can inherit $11.2 million in your lifetime without paying taxes on it. And if you’re married that means you can receive $22.4 million and avoid any estate tax.
Since almost no one inherits nearly a quarter of $100 million dollars paying estate taxes for nearly everyone has become non-existant.
The 1040 form is more simple
The new Form 1040 is now much sleeker and simplified with only 23 lines, down from 79.
Qualified Business Income
Because corporations got such a big tax break, lawmakers wanted to also give small business owners a tax cut as well. And so they introduced the Qualified Business Income (QBI) also known as the 199A deduction, which gives most pass-through entity businesses the ability to deduct 20% of income earned in 2018 up to a certain level.
With a taxable income of $315,000 or less if you’re married filing jointly – and $157,500 or less for any other filing status – you can claim the full 20% deduction.
There are some limitations and uncertainties about the 199A deduction. Learn more here at irs.gov
As you can see, there are a lot of changes when you file this year. I’ve only begun to scratch the surface of all of the changes.
Even though the changes simplified many things, it’s all still pretty complicated. You may feel confident doing your taxes on your own and if you do then visit www.myfreetaxes.com to see if you qualify to file for free.
If you have a complicated tax situation or you own a small business, working with a pro is likely the smartest move. In those scenarios, a missed deduction on your part could cost you a lot more than working with a pro.