What You can Expect from the New Tax Code this Filing Season
Tax Season is Upon us-what to expect for this filing season
Wondering how the new tax code will affect you?
In the next few weeks we’re going to start receiving our 2018 tax forms—W2s from employers, interest statements from the bank, notices from Social Security, 1099s from our investments and retirement income, landlord certificates and other miscellaneous tax forms. If you’re confused about what the new tax code is going to mean for you, here’s a primer to explain some of the basics that will directly impact taxpayers:
- The standard deductions have nearly doubled. If you’re a couple whose status is married filing jointly, your standard deduction goes up from $12,700 to $24,000. Single filers see an increase from $6,350 to $12,000 and head of household status increases from $9350 to $18,000.
- There are no more personal exemptions. If you were married filing jointly and you had two kids in the mix, last year you could take the standard deduction of $12,700 PLUS you could also deduct a personal exemption of $4050 per person, or $16,200. So, your total deductions in 2017 would have been $28,900. For 2018 it will be only $24,000.
- There’s a good chance you won’t get to itemize this year if you have in past years. Using the example of the married couple, if you itemized in 2017, that means you had enough deductions that added up to more than $12,700. The most common deductions were mortgage interest, home equity loan interest, state income tax, and real estate taxes and charitable donations. For 2018, you can only claim $10,000 of your state income tax and real estate taxes combined. And, you can’t deduct home equity loan interest unless it was used to repair your home. So, unless you have a brand new large mortgage where your interest payments for the year were in the tens of thousands, it’s unlikely that you will be able to itemize.
- What are deductions and exemptions anyway? If your W2 shows that you made $37,500 on line 1, that’s considered your income. In 2018, if you’re filing single, and you have no other adjustments to your income you can subtract $12,000 from that (the standard deduction with no exemption) so your taxable income is $25,500. That's the number the IRS uses to figure out how much you owe.
- The tax bracket changed and is lower than past years. The United States has a progressive income tax system. Unlike the regressive state sales tax, where everyone, no matter their income, pays 6% for a purchase at the hardware store, the less money you make, the lower your “tax bracket”. For the married couple, the first $19,050 of their taxable income is taxed at 10%, the next $19,050 to $77,400 (or up to $58,350) is taxed at 12%. Any remaining income over the $77,400 and up to $165,000 is taxed at 22%. The maximum a person’s income can be taxed at is 37%. Most Americans’ income tax will be in the 12% and 22% brackets. In the 2017 tax year, those brackets would have been 15% and 25%.
- In short, your taxable income may be higher, but the tax on that income will be lower. If in 2017 you and your spouse’s adjusted gross income was $65,000, and you took the standard deduction and 4 personal exemptions for you and your 2 kids, your taxable income would have been $36,100 ($65,000 minus $12,700 standard deduction minus $16,200 personal exemptions). This year your taxable income will be $41,000 ($65,000-$24,000 standard deduction). What does that look like in your income tax owed to the federal government? Last year, before you received any credits, your income tax would have been $4485. This year, before credits, your federal income tax will be $4539-- that’s $54 more. Disappointed? Keep reading!
- The child tax credit changed. In 2017 the tax credit was $1000 per child (up to three children per household) for kids under 17 years of age. In 2018 it increased to $2000 per child (up to 3) with a higher income cap threshold. Up to $1400 of this credit is refundable as an additional child tax credit or 15% of your earned income over $2500, whichever is less. There’s also a new “dependent” credit-you can claim a $500 non-refundable credit on your 17 or older dependent.
- The earned income tax credit pretty much stays the same. One of the biggest tax reforms to lift folks out of poverty, the EITC has modest increases in 2018, on par with inflation.
So, the bottom line—there will be winners and losers because of this new tax code, and a lot of folks who file with VITA will see a modest gain overall—lower taxes and higher refund. If you make $55,000 or less, you can have your taxes prepared and filed free at one of Capstone’s Volunteer Income Tax Assistance site. The schedule with times and locations are available on our website, www.capstonevt.org.
By Liz Scharf
Liz is an AFCPE® Accredited Financial Counselor® and VITA Certified Tax Preparer at Capstone Community Action