The Tax Cuts and Jobs Act made sweeping changes to the Tax Code. There are some tweaks that received a lot of attention, while others are not so clear. One thing is for sure: with the new adjustments, your taxes will need more attention in 2018 than they did last year. We have you covered with 3 of the most basic changes that you need to know.
- You will need to perform a mid-year checkup.
The tax brackets have changed significantly. For example, a married couple filing-jointly with a household income of $200,000 would have been in the 28% tax bracket in prior years. In 2018, the same couple will be in the 24% bracket.
Payroll companies have adjusted to the new brackets, but other changes to itemized deductions, among others, your withholding may not be calibrated perfectly. If you do nothing, you are at an increased risk of over- or under-withholding. One major complication? The W-4 form telling your employer how much to withhold still asks how many exemptions you want to claim, even though Congress has eliminated the personal exemption as a concept.
If you prepare your taxes with us at Morris Legal and Tax, year-round advice is included in your annual subscription. It would be an opportune time to reach out to us to do all of the calculations for you. We can tell you if you are on track to meet your 2018 tax liability and whether or not you need to withhold any more. Much better to find out you have a large tax bill now while you can still budget for it than to find out on April 10th that you owe a large sum on April 15th!
If you haven’t already, send us your most recent pay stubs so we can ensure that you are on track.
- Some families who have always itemized will now take the standard deduction
As always, taxpayers will be allowed the choice of itemizing their deductions or taking the standard deduction. Higher deductions will lower your taxable income, so taxpayers whose itemized deductions are greater than the standard deduction generally opt to itemize. In 2018, however, the standard deduction has been raised substantially. A single filer will see his or her standard deduction go up to $12,000, from $6,350, while the married filing jointly status will get a $24,000 standard deduction, up from $12,700.
No doubt, there are a large amount of people who will now take the standard deduction, especially in light of some new limitations to itemized deductions. Most notably (and the topic that has perhaps gotten the most press attention), the State and Local Tax Deduction will now be capped at an aggregate $10,000.
The raised standard deduction will not be as high-impact as you may initially think, however. It will be offset by the elimination of personal exemptions, a deductible amount for each individual in the household, which for the 2017 year was $4,050 per exemption for married couples making under $313,800.
In any case, you will need to work closely with your tax preparer next year to figure out what the best route is for you and your family.
- The Alternative Minimum Tax (“AMT”) will be lower for many
Chances are, if you know what the Alternative Minimum Tax is, you have been affected by it in the past. The idea behind the AMT is that higher-income individuals who have lowered their taxable income through certain deductions have to effectively add some of those deductions back before calculating their tax liability. The AMT is the system that ensures taxpayers will have to pay a minimum tax rate even if their deductions would have otherwise brought that tax rate below the minimum threshold.
Like the name suggests, it is an alternative way of calculating your income tax. The taxpayer is responsible for calculating his or her tax under the regular system and the AMT, then must pay the higher amount.
In 2018, the AMT exemption amount has been raised (think of this as a kind of standard deduction for calculating your AMT tax liability). For single filers, the exemption is now $70,300, up from $54,300. For married couples filing jointly, the exemption is $109,400, up from $84,500.
This will be a welcome relief to those who have always paid the AMT. As always, however, each tax situation is different, and your outcome will be unique to you and your situation.