There is a lot of information out there with the new tax law changes, from various sources both from those in the tax business and those not in the tax business. Please be careful what you read from those not in the regular business of filing individual federal income tax returns. Taxes are not unilaterally the same for everyone, and the changes will mean different things for different people. The laws apply to you based on your particular facts and circumstances.
Knowing that, there are many things that are changing for everyone. The change is the same, but the impact (dollar change) it will have on your personal tax return WILL vary from your friends and family.
- The tax rates have changed. The general rate at which we are taxed personally has gone down. Most of us would shout YAY for such a change. The catch is, that the change did not only happen on the tax return. It also affected how much money comes out of your paycheck. Your payroll uses, in simple terms, a pre-determined math table to compute how much to take out of your check, which is modified by the form they asked you to fill out when you were hired (Form W4). Due to the tax rate changes, their tables were updated. Just because the tax calculation for you may result in $1,000.00 (number picked at random) less in taxes – if your paycheck actually pays $950.00 (again picked at random) less in taxes, your refund will only increase by $50.00. Not a bad thing, you got your money during the year instead of at the end of the year. The system was designed, and a lot of work went into, trying to balance it as best as possible.
However, due to your personal facts and circumstances, it is also possible your taxes only go down by $200.00 and your paycheck still pays $950.00 (a made up number, it varies based on your pay) less in taxes, that means that you lose dollars on your refund, or owe more money than you have in the past. Please be ready to fill out a new form W4 as soon as you have calculated your tax return. That will help your payroll make the appropriate adjustment to your paycheck so the tax return is much closer to what you would like it to be next year. The IRS has been putting out a voluminous amount of media urging taxpayers to look closely at their paycheck withholding because it is likely to surprise a lot of people.
- Personal exemptions have been removed. This can be a tricky one to talk about. In the past, there was a deduction per person listed on your tax return. You count yourself, spouse, and dependents. The deduction in 2017 was $4,050 per person. There is NO deduction per person in the new tax law. There were things done to mostly balance it out, such as increasing the standard deduction, lowering the total tax rate, increasing the child tax credit (kids under 17) and adding a family member tax credit (kids 17 or older for example). Claiming children under or over 17 still helps you pay less taxes, it is just a little bit less than it was in the past.
The child tax credit changes will be where a lot of variance will happen if people compare notes one with another. The child tax credit has been doubled to $2,000.00 but the total refundable credit is only $1,400.00. That means for some, their child under 17 years old will offset the full $2,000.00 of taxes, while others will only increase their refund by $1,400.00. Please do not simply read the child tax credit doubled and expect a $1,000.00 increase in your refund per child. It may be true, but it is also possible it will not – it will depend on your facts and circumstances.
- A limit was introduced to the state and local taxes you pay as a deduction. 2017 and prior, you were able to deduct all the property taxes on your home and second home, in addition to all the state or sales tax paid in the year. 2018 and forward, you are limited to a total of $10,000.00. If you don’t own a home, or your property taxes are very low, this change may not affect you (because you’re likely under the $10,000.00 amount). If you own a larger home, or purchased 3 cars in 1 year (or live in a state with state income tax withheld from your paycheck) you are now only allowed to claim the first $10,000.00 of those deductions as a total. The rest is simply disallowed.
- Deduction for expenses paid as an employee. This will be another very short and very sad section. 2017 and prior, the expenses you incurred as an employee (work expenses) that qualify as deductions that you were not reimbursed for were allowed as part of your itemized deductions. The section of the Form Schedule A (itemized deductions, or long form) for employee expenses, was removed.
While this can be a very frustrating change for many, please consider the increase in the standard deduction as mentioned above. Meaning for some, you gained and lost deductions, not only lost deductions. For others though, it is a simple loss in deductions, which makes item #1 of this post, especially important to those in this circumstance.
If you are a contractor, or own a small business, there is no change to your work related expenses.
- Postcard tax return. The IRS has changed their forms to being a partial page each, but at the same time not actually simplifying anything (as of the writing of this blog at least). The information is now spread out across more pages. It is true that for some with very straightforward circumstances, it will be simple. It was simple before, too. Most everyone has 2-3 things different than 1 paycheck only. It could be daycare, a small side business or a rental property. Many look at the tax preparation industry and think we won’t be needed any longer. I disagree, and ask you to consider this – if the forms and laws have changed so dramatically, how can you be confident of what you are reviewing to know it was filled out properly? We have that confidence and expertise.
In a year of such dramatic change, we urge you to please seek a competent tax professional, especially one who values educating and elaborating on your tax return and makes recommendations for change based on your particular facts and circumstances.
Senior Tax Professional