In December, 2017, President Trump signed The Tax Cuts and Jobs Act. Because of the sweeping income tax changes in this new tax law, there is a direct effect on virtually all individuals filing returns in 2018 and forward. Therefore, to keep everyone in the know, let’s look at some of the changes.

Income tax changes: Lower tax rates and payments

Firstly, almost everyone will pay lower federal taxes in 2018 than they do now. But, that is with the exception of individuals described in Item No. 4 below. The tax rates overall were reduced and the tax brackets widened resulting in lower tax liabilities. However, be aware that according to the new law, those cuts will expire in the year 2025.

Tax Brackets and Rates for 2018

Rate	For Unmarried Individuals, Taxable Income Over	For Married Individuals Filing Joint Returns, Taxable Income Over	For Heads of Households, Taxable Income Over
10%	$0	$0	$0
12%	$9,525	$19,050	$13,600
22%	$38,700	$77,400	$51,800
24%	$82,500	$165,000	$82,500
32%	$157,500	$315,000	$157,500
35%	$200,000	$400,000	$200,000
37%	$500,000	$600,000	$500,000

 

Income tax changes: Standard deduction

Secondly, the standard deduction is now much higher, at $12,000 per person vs. the current $6,500 per person. As a result, far fewer people will have enough deductions to itemize, and filing will be simplified. On the other hand, the current personal exemption of $4,500 has been eliminated, so the net effect in the increase in the standard exemption represents an increase of only $1,350. In short, it is estimated that 95% of tax return filers will not itemize their deductions in 2018.

Income tax changes: Medical deductions

Thirdly, the threshold is now lower so expenses in excess of 7.5% of income can now be deducted, which is an improvement from the current 10% minimum. As an example, if a taxpayer has an adjusted gross income of $50,000, they could deduct total medical expenses over $3,750 (7.5% of $50,000). However, to do that the taxpayer would have to have at least $8,250 in other itemized deductions to go over the $12,000 standard deduction. To clarify, it comes down to meeting the level of the new standard deduction in order to itemize deductions at all.

Income tax changes: State and local tax deductions

The most significant change is that taxpayers who live in high tax states like NJ, NY, CT, MA, and CA, and who have significant incomes and or property taxes, are now able to deduct up to only $10,000 for property, income, and sales taxes (combined). As a result, chances are good that they will be paying out more than allowed on their deduction. Meanwhile, for people in other states, most taxpayers’ deductions are below that threshold already.

Income tax changes: Estate taxes

As a result of the new law, heirs of very wealthy retirees just got richer. Certainly, this is because the exemption threshold for taxable estates increased from $5.6 million to $11.2 million.

Income tax changes: Individual mandate

Starting for the 2018 tax year, the penalty for not having health insurance is eliminated. Therefore, the tax liability on some returns will be less.

Previously, with the upcoming income tax changes, taxpayers were encouraged to change the deductions they claim on a revised Form W-9 at the beginning of the 2018 year in order to adjust for the new tax law. However, those adjustments were based on ‘best guess’ estimates. Therefore, some taxpayers are facing the unknown this tax season. Consequently, it’s good to be aware that many taxpayers are preparing their returns early in anticipation of the changes they expect to see. On the other hand, the deadlines have remained the same, so even if your tax return is completed early, you still have until April 15 to file.

Importantly, because of the multitude of income tax changes, including not just the above, but changes to credits and other deductions, working with a tax professional ensures you take advantage of every benefit and prepare your return accurately. Further, this is especially true for self-employed people. Certainly, the income tax changes going into effect in this upcoming tax season means your return requires extra time and above all, extra attention.

Dan