Tax reform has been in the news for the last 12 months and we’re getting closer to our first filing season under new laws. To help you prepare, we’ve put together a list of some of the biggest changes and how you can take advantage of them before the end of year to help lower your 2018 tax bill.
Higher Standard Deduction Means Fewer People Will Itemize
The standard deduction nearly doubles from the previous $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples filing jointly. The new, higher standard deduction will eliminate the need for many households to itemize their deductions. According to the nonpartisan Tax Policy Center, over 65% of people who itemized their deductions in 2017 will file for the standard in 2018.
Under the old law, a taxpayer would claim the higher of their itemized deductions or the standard deduction, plus claim their personal exemptions, which were subject to phase out rules and receive no benefit if you were subject to the Alternative Minimum Tax (AMT). In 2018, all you claim is the new higher standard deduction or your itemized deductions. It’s that simple.
However, if you are someone who is still planning to itemize in 2018, you will need to be far more strategic about maximizing your deductions.
Limit on SALT Deductions Could Mean Paying More Tax
The deductions for state and local income or sales and property taxes are still allowed, but capped at $10,000 total. This goes back to the reason many people will likely be taking the standard deduction as only being able to deduct $10,000 means that if you’re married, filing jointly, you’d have significant space to fill with other deductions before you’re getting a benefit for itemizing.
Because of that, Charitable donations may no longer have a financial benefit. Remember, you only get a benefit for your charitable donations when you itemized your deductions. If you find yourself claiming the new higher standard deduction, that means you are not getting a financial benefit for any charitable gifts you make during the year. Consequently, doubling up on gifts, paying off pledges, or front loading gifts during a year you itemize may be advantageous, although it will take advanced planning to pull off.
Child Credits Changes Could Help Offset Loss of Deductions
Changes to the child tax credit will make many parents happy for two reasons: the credit doubled from $1,000 to $2,000 per child and the income phase-out threshold increased almost 400%, from $110,000 to $400,000 for both single and married households.
The old law created a disincentive for households to make more than $110,000, as the phase-out of the child tax credit, which combined with the regular income tax, created marginal tax rates of 45-55%. The new law eliminates this concern so taxpayers with income between $110,000- $400,000 will only pay rates of 24% or 28%. This should give parents a better return come tax filing season this year.
If you have any questions or concerns about how the new laws this year will affect your tax filing strategy, we recommend consulting your tax advisor to ensure you are able to keep as much of your hard earned money as possible.
This article was originally published on Nov. 18, 2018 in the Brainerd Dispatch.