Just when you were starting to get comfortable with your annual chore of tax filing, things changed. The 2018 tax reform bill hit the scene. Over the past year, you’ve heard about updates ranging from tax rates to deductions, and your head is spinning.
Not that you’ve ever loved tax season (who does?), but now you’re dreading it.
Don’t worry—we’ve got your update! We want you to feel confident in doing your taxes. And here’s the good news: Even though the tax reform bill brought some big changes, it made a lot of things simpler.
Stick with us, and we’ll break down the details so you understand what’s changed and how those changes impact you now that it’s 2019!
The Tax Reform Bill Impacts Your Taxes This Year
That’s right. Even though the tax reform bill—formally known as the “Tax Cuts and Jobs Act”—was introduced a full year ago, it didn’t apply to the taxes you filed last year.
But when you file in April, you’ll feel the difference. You probably even noticed less money being withheld from your paychecks this year as a result of the changes.
The difference in Income Brackets and Marginal Tax Rates
First, one of the most talked-about changes in the 2018 tax reform bill was the update to income tax brackets and marginal tax rates.
So what are marginal tax rates? Those are the percentages of your income that you pay in taxes. What this means for you: Your income is not taxed at one rate but several different rates, depending on how much you make.
How do you know your tax rates? Enter tax brackets. Tax brackets are income ranges. It’s that simple.
Each tax bracket corresponds to a tax rate. For example, if your income is $120,000, your tax rate isn’t a flat 24%. Instead, part of your income is taxed at 10%, part at 12%, part at 22%, and part at 24%. (You can check out the chart below to see all the tax brackets with their corresponding tax rate.)
Here’s the thing about income brackets and tax rates: It’s fairly common for tax brackets to change to account for inflation each year. But the marginal tax rates only change when a new tax law is passed—which doesn’t happen often. That’s why people were especially interested in this part of the tax reform bill.
Is this good or bad news for you? This year, it’s good news! Lower marginal tax rates mean you can pocket more money from your paycheck!
Plus, getting hitched just got easier! Not only will you have a lower tax rate this year, but the shift in tax brackets also removes what used to be an unintentional tax penalty for married filers. Under the 2017 tax law, some married filers were pushed into a higher income bracket when they combined their income with their spouse’s. Now the new income brackets are simply doubled for joint filers, which means that unintentional marriage penalty is gone.
The difference in the Standard Deduction
What else has changed? Another important difference in the 2018 tax reform bill is that the standard deduction has almost doubled. That’s great news!
The standard deduction is an automatic reduction in what you owe in taxes. When you pay taxes, you have the option of taking the standard deduction or itemizing your deductions. If you itemize, you calculate your deductions one by one. Itemizing is more of a hassle, but it’s worth it if your itemized deductions exceed the amount of the standard deduction.
In many cases, the increase in the standard deduction will make up for the elimination of personal exemptions, leaving some Americans with more money in their pockets.
The Estate Tax Exemption
What’s the estate tax? The estate tax is a tax you pay on inherited money and property. Simple enough, right? Currently, there is a 40% tax rate on any inherited property valued over $5.49 million. In the new tax reform bill, you can inherit a total of $11.2 million in your life before the estate is hit with the 40% tax.
What About Charitable Donations?
Good news for those who like to live like no one else! In 2017, you could deduct up to half of your income in qualified charitable donations if you itemized your deductions. The new tax reform bill has increased that limit to 60% of your income.
What About Medical Expenses?
Another frequently used deduction is the medical expense deduction. Before the new tax reform bill, you could deduct unreimbursed medical expenses above 10% of your adjusted gross income (AGI), which is your total income minus other deductions you have already taken. The new tax reform bill has reduced that hurdle to 7.5% of your AGI, which means you can deduct more.
What About Health Care?
The tax reform bill doesn’t repeal the Affordable Care Act, otherwise known as Obamacare, but it does get rid of the penalty you owe if you don’t get health insurance. Keep in mind that this change doesn’t take effect until next year. So that means the penalty (which is $695 this year) still applies when you file your 2018 taxes.
Other Tax Deductions That Are Disappearing
There are a few other deductions that didn’t make it past the chopping block in the new tax reform bill, like:
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Unreimbursed employee expenses
- Tax preparation expenses
- Alimony payments
- Moving expenses
- Employer-subsidized parking and transportation reimbursement
And if you’re used to being able to write off miscellaneous work expenses, like travel or meals with clients, those tax breaks disappeared as part of the tax reform bill. That may seem like bad news, but there are plenty of other ways to save money on your small-business taxes.
If you have a small business or a side hustle, a tax pro can help you take advantage of all the deductions you qualify for.
Some of the tax changes this year—like the increased standard deduction—may make it easier for you to file on your own with Flex Tax and Consulting Group. Or you may feel so stressed that you know you’re going to lose sleep if you try to do it on your own. Flex Tax and Consulting Group has served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs. If you have any questions, please don’t hesitate to contact us at 415-860-6288 or [email protected]
