Millions of Americans overpay on their taxes each year, simply because they don’t understand how the system works. Since new tax reforms were passed in December 2017, it’s more important than ever to understand how the tax system could affect your finances. With updates to everything from the dedufctions you can claim to the amount you pay for healthcare, you simply can’t afford not to.
Read on to learn about the key updates from the IRS, so you know what to expect in the tax year 2018 and in the years to come.
1. New Tax Brackets and Rates
The new bill will maintain the seven-bracket structure, but income levels and rates are changing from 2018. The top tax rate will drop from 39.6% to 37%, which will be great news for high-earners with an income of over $500,000 (single filing) or $600,000 (joint filing).
Here’s an overview of what the updated tax brackets look like:
|Tax Rate|| Income Bracket:
2. Standard Deduction Differences
Not only are tax rates dropping in 2018, but the standard deduction has almost doubled. The standard deduction is a form of automatic reduction used to minimize the amount you pay on your tax return.
While the standard deduction has gone up for all U.S. citizens, it’s worth noting that personal exemption has been eliminated. In 2017, you may have been able to get a $6,500 standard deduction alongside a personal exemption of $4,150. In the new tax plan, you’ll simply receive a deduction of $12,000, which has simplified the tax situation to some extent.
In 2018, the standard deductions are:
- Single: $12,000
- Married and joint filing: $24,000
- Married and separately filing: $12,000
- Head of household: $18,000
3. Homeowner Tax Differences
Another significant change to the tax situation in 2018 comes in the form of the mortgage deductions homeowners can make. If you have itemized your tax deductions up until now, you will have had the option to deduct interest paid on your home or second home. This deduction could reach a cap of $1 million on your mortgage principal, and it could include more than one loan.
The new reform imposes a cap of $750,000. However, taxpayers who have already engaged in mortgages between $750,000 and $1 million will be able to continue on the old deduction — although the new reform removes the deduction permitted for home equity debt.
4. New Alternative Minimum Tax
The alternative minimum tax (AMT) was a concept implemented to make sure that high-income earners paid the right amount of taxes, regardless of the number of deductions available to them. Higher-income households had to calculate their taxes both under the standard system and under AMT, so they could pay whichever amount was higher.
For the most part, the government didn’t index AMT exemptions for inflation purposes. This means that over time, AMT started to affect the lower-income individuals it wasn’t intended for. The new bill adjusts exemption amounts for inflation purposes. For instance, for the single or head of household filer, the 2017 AMT exemption was $54,300 — now it’s $70,300.
5. Lost Deductions
Personal exemptions are disappearing under the new tax law. There is also a selection of additional deductions that will no longer apply in the years ahead. From 2018, lost deductions include:
- Employer-subsidized transportation and parking
- Moving expenses
- Tax preparation expenses
- Miscellaneous deductions under the 2% adjusted gross income (AGI) cap
- Unreimbursed employee expenses
- Theft and casualty losses
6. Changes to Medical Expenses
The medical expense deduction is one of the most frequently used deductions in tax law. Prior to the reform bill, it was possible to deduct medical expenses of up to 10% of your AGI. The new bill has reduced that percentage to 7.5%.
The Affordable Healthcare Act, or Obamacare, will remain in effect for 2018. The new bill, however, will remove the individual mandate penalty for those who don’t pay their health insurance.
Handling the Latest Tax Changes
As complicated as all these new tax changes may be, you need to know exactly what you’re dealing with when you file your tax return each year. By talking to a tax expert about your situation, you don’t have to worry about overpaying or filing incorrectly.
Contact Milikowsky Tax Law today and speak to a dedicated tax lawyer if you need help resolving tax debt, navigating an IRS audit, or otherwise understanding how the new codes will affect your finances.