By now we are all aware of the most recent tax overhaul, but what does it really mean?
This is the largest tax overhaul since 1986. Typically, for each cut there is a revenue generator, but this is not the case with this most recent tax overhaul. This is why the deficit will go up over the next 10 years. The majority of tax savings went to the top 1 percent, with the rest of the country seeing little to no tax savings. What does this mean for you? Below are some key changes for the average taxpayer that will take effect beginning with tax year 2018.
The standard deduction has increased. For single taxpayers, the deduction is now $12,000. For married taxpayers, the deduction is now $24,000 and for head of household payers, it is now $18,000 for the year. This sounds great in theory, however, if your itemized deductions are just shy of the standard deduction numbers for 2018, then you will no longer need to file a Schedule A with your return. This means no benefit for your mortgage interest, charitable contributions, medical or state and local income tax.
The offset to this change is that the personal exemption has been wiped out. This means no more reduction to income for you or your dependents. For example, if you are single with two children and in 2017 your itemized deductions were $15,000 and you claimed three exemptions, your income would be reduced by a total of $27,750. Under this new tax bill, you would reduce your income by the new standard deduction of $18,000 and receive no benefit for the dependents, thus paying tax on $9750 more income then in 2017.
The state and local tax deduction has been limited to $10,000 total. This means that if you have $10,000 in Georgia income tax withheld from your paycheck and you also pay $10,000 in real estate taxes, you will no longer be able to deduct the total for both. You are limited to only $10,000, which means you are now going to pay tax on the additional $10,000 you used to be able to deduct.
The deduction for miscellaneous expenses over 2 percent of your adjusted gross income are no longer available. If you are in sales, you oftentimes have travel, entertainment and work-related expenses that are not reimbursed by your employer. Prior to January of this year, you could deduct these if you itemized and they were more than 2 percent of your adjusted income. Now, you may not deduct these expenses. If you are in this situation, you may want to negotiate with your employer to have more of your work expenses covered directly through the company since you will no longer get to write them off.
Moving expenses are no longer deductible unless you are a member of the Armed Forces on active duty. If you are planning to move for work and the new location is more than 50 miles from the old location, negotiate with the new employer to have them pay your moving expenses. They will add this to your pay, but at least you will not be paying the costs out of pocket with no tax benefit.
The penalty for not having health insurance has been reduced to zero for tax years beginning after 2018. This was permanently repealed.
The mortgage interest deduction is now limited to interest on a mortgage of less than $750,000. This means if you purchase a home and borrowed $800,000, you would only be allowed to deduct 93.75 percent of the interest you pay. Anyone purchasing in areas like Brookhaven, Decatur, Roswell, etc will now be limited in how much interest they are able to claim. Additionally, you may no longer deduct interest paid on a home equity line of credit. If you have a home loan over $750,000 that was obtained prior to Dec. 31, 2017, you may refinance this loan and still be able to deduct all interest providing that the new loan does not exceed the amount of the refinanced indebtedness. This mean you can refinance, but would not be able to deduct interest on any cash out.
The Bottom Line: This most recent tax overhaul was supposed to simplify filing for many; however, it has made things more complicated. It is advisable to seek a licensed professional to help determine how this most recent tax overhaul will affect your income tax in 2018 and forward. You may want to consider changing your withholdings at work to ensure you do not owe at year end. You may also want to consider increasing your contributions to pretax benefits through work to help reduce your tax under the new law. It is better to be proactive rather than reactive.
Five Fresh Tax-Filing Tips
- DO make sure to include all income including jury pay
- DON’T make up numbers for your itemized deductions
- DO make estimated payments if you are self-employed
- DON’T wait until the last minute to prepare your return
- DO hire a licensed professional to assist you