On December 22nd, 2017 the President signed into law the Tax Cuts and Jobs Act (TCJA). According to Conference Committee, a typical family of four earning the median family income of $73,000 would receive a tax cut of $2,059. You don’t care about the “typical family” you want to know if this act will save you money.
There is a lot of “good news, bad news” in this act. Whether you receive a tax cut or not will depend on whether you are subject to more of the good, or more of the bad.
It’s still in its draft form, but the current 1040 appears to fulfill the “postcard sized” tax return promised by politicians. In addition to the new look, six new schedules were created that may be attached to the 1040.
Here’s some of that “Good news”; the income tax brackets have been expanded and rates lowered, with a new top tax rate of 37%. These new rates are a significant decrease to the 2017 brackets. The Standard Deduction amounts for individuals has nearly doubled, increasing from $6,500 to $12,000 for a single taxpayer; however, the personal exemption has been eliminated. Under old law, a single taxpayer that would have been entitled to a $6,500 standard deduction and a $4,150 personal exemption for a total of $10,650 in income exclusions. Under the new tax plan, the same filer would receive a $12,000 standard deduction. Overall these changes are good news, but not as substantial when you take both the standard deduction and personal exemption into consideration.
With the repeal of the personal exemption, the income exclusion for children and dependents will also be lost. There is some good news to go with that though, the new expanded child tax credit will be available for children under the age of 17. This new credit will double the child tax credit from $1,000 to $2,000 per child. In addition, for children who are 17 or older, taxpayers may now claim a new $500 family credit.
There are also a few important changes to itemized deductions. Again, some good, some bad. The income threshold to claim an itemized deduction for medical expenses has been reduced from 10% to 7.5%, making it a little bit easier to claim medical expenses. Bad news, while still deductible, state property and income taxes will be capped at $10,000. More bad news: at the time of this writing, Property Mortgage Insurance or PMI is no longer deductible; but are still hoping PMI deduction may be extended into the 2019 filing season.
Some bad news that will affect many of our clients is the elimination of the Miscellaneous Employee Expenses. This deduction allowed employees to deduct expenses for work boots, small tools, clothing and mileage to name a few. These are no longer deductible.
One of the most beneficial changes from TCJA comes in the form of QBI, or deduction for Qualified Business Income. This deduction may help shelter a significant portion of income for taxpayers with Business Income. If you qualify, this would entitle you to up to a 20% reduction to QBI which could translate into a large tax savings. The details to the credit are outside of the scope of this article, but if you have income from a business, it will be worth discussing with us.
So, does this act save you money? As with most other tax questions: It depends. Rest assured, we work diligently to partner with you. Our goal is not just to prepare a timely and accurate tax return, but to work with you through all steps of your financial life to best position you to meet all your financial goals, present and future.