An Inside Look at Tax Reform…
Last year simple tax returns were only 2 pages of content, had a higher tax bracket, and federal refund amounts were larger than those filed this current tax season. The thought of getting a smaller refund upsets many, but the truth is that the smaller refunds are an indication of a better tax system. This is because of all the different tax changes made under the Tax Cuts and Jobs Act. Some of the major changes are that there are no longer any personal exemption deductions, the standard deduction amount has nearly doubled, and the actual numbers in the tax bracket have shifted based off of a metric known as the Chained CPI.
Specifics About the Tax Reforms
In previous years tax payers found it beneficial to file their returns using itemized deductions. With the adjustments made under the TCJA, it’s important to point out the new limitations on itemized deductions. First and foremost, the deduction for state and local income taxes (the SALT deduction) is capped at $10,000 ($5,000 for married filing separately). This tends to affect those living in states with high income taxes and high property taxes the most. Furthermore, all miscellaneous itemized deductions subject to the 2% floor are repealed through 2025, meaning no more deductions for unreimbursed employee expenses, tax preparation fees, investment advisory fees, etc. Home mortgage interest deduction is deductible on only $750,000 of indebtedness.
On a positive note, the standard deduction has now doubled, from $12,000 in previous years to the current $24,000 for taxpayers with a filing status of Married Filing Jointly. These two factors combined, limitations in itemized deductions and a drastic increase in the standard deduction, has significantly increased the number of Americans taking the standard deduction over the itemized deduction. This change is a lump fix to eliminate complicated personal exemptions and cut back on taxes nationwide.
Taxpayers will also find that the Child Tax Credit has doubled and the limitations on income are far less restrictive than in previous years. The Child Tax Credit which has been a standard $1,000 dollars in previous years, was increased to $2,000 for each qualifying child under the age of 17. By nearly quadrupling the credit’s phaseout threshold for joint filers, the range of American taxpayers who benefit from the Child Tax Credit has been increased significantly.
As an offset to these considerable changes, there are no longer personal/dependency exemptions. The exemption was a set amount you could deduct for every taxpayer and dependent on your 2017 or prior tax return. The exemption amount in tax year 2017 was $4050 per person. In 2018 the application of the Tax Cuts and Job Act repealed the personal exemption and instead increased the standard deduction amount, doubled the Child Tax Credit, and created a new $500 Credit for Other Dependents.
For the first time ever, the Qualified Business Income deduction is available for eligible business owners on their tax returns. This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income plus 20% of any qualified real estate investment trust and publicly traded partnership income.
What This Means For You?
If you need help understanding how the numbers are being implemented and how the IRS is reading your taxes, feel free to consult the professionals at Private Tax Solutions, we will be happy to provide you peace of mind.