Families should expect some changes when they file their 2018 tax returns next spring as a result of the new tax law. Donald Trump has claimed that the Tax Cut and Jobs Act that passed in late 2017 offers massive tax cuts. However, some families could end up paying more in taxes next year.
“There are a lot people who think it’s all positive,” said Dave Janosek, co-tax lead managing director at CBIZ MHM. “In some cases, it’s not.”
Keep reading to see how families will benefit — and lose out — from Trump’s tax reform.
Tax Rates Are Lower
The new tax law lowered all but two of the existing tax rates. In 2017, the tax rates were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. Now, the tax rates are 10 percent, 12 percent, 22 percent, 24 percent 32 percent, 35 percent and 37 percent.
Most families will pay less in taxes as a result of the lower rates, according to the IRS. However, if you didn’t adjust your tax withholding properly this year, you might not get the refund you’re expecting. In fact, if you didn’t pay at least 90 percent of your taxes through the year, you might owe an estimated tax penalty when you file, according to the IRS. Use the new withholding calculator at IRS.gov to see if you’re withholding the right amount.
The Standard Deduction Is Bigger
The standard deduction for married couples filing jointly nearly doubles from $12,700 in 2017 to $24,000 in 2018 under the Trump tax reform. And the head of household standard deduction increases from $9,350 to $18,000.
Even more taxpayers will likely claim the standard deduction rather than itemize because it is so much bigger now, Janosek said. “A lot of families’ taxes will be simplified because they don’t have to worry about itemizing,” he added. That will make it easier to fill out a Form 1040.
Personal Exemptions for Dependents Disappear
Families with dependents will no longer be able to claim exemptions for them. In fact, the GOP tax plan does away with both personal and dependent exemptions, which were worth $4,050 per exemption in 2017.
However, the loss of exemptions shouldn’t hurt most families. “The increase in the standard deduction more than makes up for the loss of the personal exemption if you weren’t itemizing,” Janosek said.
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The Child Tax Credit Will Increase
Families with kids might be able to take advantage of a bigger child tax credit on their 2018 tax returns. The child tax credit increased from $1,000 to $2,000. You can claim this credit for children under age 17 — including foster children and relatives such as siblings, nieces, grandchildren — who lived with you more than half of the year and didn’t provide more than half of their own support.
In addition to the bigger credit, the tax reform increases the income threshold at which the child tax credit begins to phase out. Now, the credit begins to phase out when adjusted gross income (AGI) is more than $200,000 for single taxpayers — up from $75,000 — and $400,000 for married couples filing jointly — up from $110,000. So more higher-income families will be able to take advantage of this tax credit now.
A New Dependent Deduction Will Be Available
Even if your dependents don’t meet the criteria for the child tax credit, you still might get a tax break for the kids of family members you’re supporting. “There is a new $500 credit for eligible taxpayers who support a dependent who is not eligible for the child tax credit,” said Dave Du Val, chief customer advocacy officer for TaxAudit. The credit can be claimed for dependents who are 17 and older.
Moving Expense Deduction Disappears
Families who moved in 2018 will miss out on the moving expense deduction, which the Trump tax law suspended. In 2017, if you moved at least 50 miles for a job, you could deduct moving expenses and the cost of traveling to your new home, including lodging and 17 cents a mile for using your vehicle to move. Plus, you didn’t have to itemize to claim this deduction. In 2018, those expenses aren’t deductible, and any reimbursements from an employer for moving will be included in income.
The suspension of the moving expenses deduction does not apply to members of the armed forces. So military families still can write off moving expenses related to a change of station.
529 Plan Money Can Be Used for Primary, Secondary School
As the name suggests, funds in a 529 college-savings plan can be used to pay for qualified post-secondary education. However, the new tax law allows 529 money to be used tax-free to pay tuition for elementary and secondary schools.
“That is a change they made to benefit families in private schools,” Janosek said. However, the amount of the withdrawal is limited to $10,000 per year per beneficiary.
State and Local Tax Deduction Is Modified
Families in high-tax states might lose out as a result of the Trump tax reform if they itemize. That’s because the new tax law limits the total state and local income, sales and property taxes you can claim as a deduction to $10,000, or $5,000 if you’re married filing separately. So you won’t be able to claim any state and local taxes you paid above that amount in 2018.
Mortgage Interest Deduction Is Limited
The Republican tax plan also creates new limits on the mortgage and home equity loan interest deductions. If you bought a home after Dec. 15, 2017, you can only deduct interest on up to $750,000 in mortgage debt rather than $1 million. That limit applies to the combined amount of loans on both main and second homes.
Plus, you now can only deduct interest on home equity loans used to buy, build or improve your home. So families who borrow against the equity in their homes to pay for college or pay off other debt will no longer be able to write off that interest.
Itemized Deduction for Medical Expenses Is Modified
Families with high medical expenses might benefit from a temporary change to the tax law in 2018. Now, itemizers can deduct unreimbursed medical and dental costs that exceed 7.5 percent of their 2018 AGI. Before, only expenses that exceed 10 percent of AGI could be deducted.
However, this lower threshold disappears in 2019. So if you’re contemplating any medical procedures, you might want to have them done in 2018 to increase your chances of being able to write off the cost.
Charitable Contribution Deduction Restrictions Are Relaxed
Generous families might be able to deduct more of their charitable contributions in 2018. The new tax law increases the limit on charitable contributions of cash that can be deducted from 50 percent to 60 percent of adjusted gross income.
However, some families might no longer be able to benefit from this itemized deduction if their itemized deductions don’t exceed the new higher standard deduction.
“Taxpayers whose itemized deductions are around the same amount as the standard deduction or below should evaluate whether they should use the strategy of ‘bunching’ deductions for items such as charitable contributions,” Du Val said. “In this strategy, taxpayers itemize every other year and include two years’ worth of deductions in one tax year.”
In other words, you might want to make next year’s charitable contributions in 2018 if it helps you have enough itemized deductions to top the standard deduction.
Alternative Minimum Tax Exemption Amount Increases
Another benefit for higher-income taxpayers from the Republican tax plan is an increase to the exemption amount for the alternative minimum tax. This tax aims to limit benefits taxpayers use to reduce their regular tax amount and ensure they pay at least a minimum amount of tax, according to the IRS.
For 2018, the AMT exemption amount is increased to $70,300 for single taxpayers — up from $54,300 — and $109,499 for married couples filing jointly — up from $84,500. “You’ll see less folks in the AMT from the tax reform,” Janosek said.
The Kiddie Tax Changes
The new tax law makes changes to tax for children with unearned income — also known as the Kiddie Tax. This tax applies to children who have interest or dividend income from investments. “For the tax year of 2017, the kiddie tax rates were the child’s parents’ highest marginal income tax bracket,” Du Val said. In 2017, that could be as high as 39.6 percent. The tax had to be paid at the parents’ rate on unearned income of more than $2,100.
For 2018, the tax applies to unearned income of more than $2,550 and the rates are 24 percent, 35 percent and 37 percent.
More on Taxes
- 12 Tax-Filing Mistakes First-Timers Always Make
- 10 Times in Life When Your Taxes Drastically Change
- 10 Brilliant Ways to Reduce Your Taxes in Retirement
- Watch: Why You Shouldn’t Assume You’re Getting a Tax Refund
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