Now that your 2017 income tax returns have been filed, it’s time to address the many changes that the new Tax Cuts & Jobs Act has made and how they will affect you in 2018. There’s both good and bad news, but mostly good for many of us.
In a brief overview, the standard deduction – which is claimed if it exceeds your itemizable deductions – has been increased to $12,000 per person, $24,000 on a married filing joint return. That will benefit many, but it comes at the cost of the elimination of dependency exemptions, which were worth $4,150 each in 2017, so a family of six loses $24,900 in deductions. If you use the standard deduction this will have virtually no impact, but if you itemize it will hurt.
The child tax credit has doubled from $1,000 to $2,000 per but it only applies to children under the age of 17. If you have four kids in college you have not only lost their dependency deductions but you also get no benefit from the child tax credit.
So-called ‘miscellaneous itemized deductions’ have been eliminated altogether. Those include unreimbursed employee business expenses among other things. That will affect many of us and it may be worth revisiting such expenses with your employer.
Tax rates have been reduced by around 2% across the board, and the income ranges to which they apply have been broadened. Given this you should review your payroll tax withholdings to make sure they’re in alignment with your anticipated 2018 tax liability. The IRS has issued a revised Form W-4 which is what employers base your withholdings on. I would encourage you to fill out a new one.
The biggest good news is the deduction for 20% of taxable income from pass-through entities such as partnerships and S corporations. That means a big reduction in taxable income to shareholders and partners. It may also apply to income derived from rental activities; we are awaiting clarification on this issue. But there are limitations/exclusions concerning certain types of service businesses.
We are available to advise you on all of these changes, including creating individualized tax projections to quantify the effect on your 2018 tax returns. If you’d like a check-up we’re here and available to assist.