You've probably heard about all the tax changes that went into effect January 1, 2018, but what do they mean for individual taxpayers? Here are our top 5 changes and how they will affect your return.
#1 The standard deduction was nearly doubled. For each return filed, taxpayers can claim either a standard deduction or itemized deductions. Itemized deductions include state income and property taxes, mortgage interest, and charitable contributions. If the taxpayer doesn't have a lot of itemized deduction, then he/she can take the standard deduction. In 2018, the standard deduction went from $6,350 to $12,000 for single filers, and from $12,600 to $24,000 for married filing jointly filers. That's a big increase. However, if a taxpayer already itemizes his or her deductions, then the benefit from this change can be reduced or eliminated.
#2 No more personal exemptions. There are always trade-offs in life, and taxes are no different. With the increased standard deduction, Congress removed the personal exemptions. Previously, each person listed on a return received an additional $4,050 exemption from their taxable income. So, a married filing jointly couple with 2 dependent children received a $16,200 exemption from income in 2017. This exemption has been removed for 2018.
#3 Child tax credit is doubled. To help those taxpayers with dependent children offset some of the loss from the change to the personal exemption, Congress has doubled the child tax credit from $1,000 in 2017 to $2,000 in 2018. In addition, Congress has changed the phase-out of this credit. In prior years, individuals and families with higher income had their credit reduced or eliminated. For 2018, single filers can earn up to $200,000 before that credit starts phasing out, while married filing jointly filers can earn up to $400,000 and still receive the full credit. This change will allow a lot more people to benefit from this credit.
#4 Tax bracket rates are decreased. On average, many of the tax bracket rate were decreased by 3%. For example, if you were in the 15% tax bracket in 2017, you would be in the 12% bracket in 2018, assuming you had the same amount of income. Many taxpayers who will see their taxable income increased by these changes could still end up paying less tax overall under the new tax bracket rates.
#5 New deduction for small business and rental owners. Small business (Schedule C, Partnerships and S Corporations) and rental owners can take a deduction of up to 20% of their business and rental income. There are some exceptions and rules regarding this deduction, especially if the business is a professional service business. Regardless, this is a big win for small business and rental owners.
Of course, this in not an exhaustive list of all the changes. Each situation will be different, so be sure to consult your tax adviser or give us a call, and we can discuss your situation and determine how these changes will affect your 2018 taxes.