The 2018 Tax Reform Bill brought changes that may have left you dreading filling in your tax return more than you usually do. You’ve heard about some of the updates and you’re not sure about how they affect you. The good news is that some of the changes make the process simpler than before.
It impacts your taxes
The tax reform bill did not apply to the taxes you filed last year but when you file again, you should see a difference. You’ve probably seen that less money has been withheld from your paycheck this year because of the changes.
Update to income tax brackets and marginal tax rates
This update is one of the most talked about changes and you’re probably wondering how this will affect you. Marginal tax rates are the percentages of your income that you pay in taxes and what you are taxed depends on how much you make.
It’s quite common for tax brackets to change to account for inflation but marginal tax rates only change when a new law is passed. The lower marginal tax rates mean that less tax is deducted from your paycheck.
The shift in income tax brackets has meant the removal of a tax penalty for married filers. When they filed together, their combined income used to push them into a higher tax bracket but this unintentional penalty has been eliminated.
Changes for taxpayers with children
The tax reform bill has raised the income limits so that more parents qualify for child tax credits for qualified children and the credit amount has also been raised from $1,000 to $2,000.
Parents also have the benefit of being able to use a 529 savings plan for education other than college, such as paying for private school for their children. However, withdrawing too much money before a child has to go to college means losing out on compound interest. Learn about tax reform today as a parent to try and determine your best option. You may need to get advice from a financial adviser.
The standard deduction has almost doubled
The standard deduction is an automatic deduction applied to what you owe in taxes. When filing your taxes, you can choose the automatic deduction or you can choose to itemize your deductions. Itemizing is obviously more work but if the amount exceeds the automatic deduction, it’s worth the effort.
The tax reform bill eliminated the amount taxpayers used to deduct from their taxable income for themselves and their dependents. Essentially, it simplified this portion of the process and in many cases, the increase in standard deduction makes up for the elimination of this personal exemption.
Changes for homeowners
The IRS used to allow you to deduct the interest you paid on your primary residence and/or a second home, as long as the original mortgage principle was not over $1 million. This amount has been lowered to $750,000. Homeowners are also no longer allowed to deduct interest paid on home equity debt, up to $100,000.
What about medical expenses?
You are now able to deduct more in medical expenses – above 7.5% of your adjusted gross income instead of 10%. You will also no longer have a tax penalty that used to be applicable for not having medical insurance.
While the tax reform bill has simplified some parts, the process is still not that easy. If your knowledge about the changes is limited, you may make unnecessary mistakes. No matter how you file, you should feel confident and if this means consulting a professional, it may just be well worth your while.