How will I be affected by tax reform?

For the first time since 1986, our tax system has gotten a major overhaul or "reform".  While there has been a lot of discussion that tax reform has simplified matters, that is not necessarily the case. Not everyone will be able to take the "standard deduction" and be done - it's just not that simple.

With roughly 70,000 pages of tax law, the process has been streamlined, but not simplified. Did you notice your paycheck change earlier this year? You can thank the IRS for the establishment of new tax brackets – there are seven  - 10%, 12%, 22%, 24%, 32%, 35%,and 37%.  This should be a welcome change to many individuals, lowering your overall tax bill as the income limits also changed, placing taxpayers into to a lower bracket than before. BUT BEWARE, as with many other things in life, there isn't a one size fits all, and this general statement may not apply to your situation.

The new law increases the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. Under the old tax plan, the individual standard deduction was $6,350 for individuals and $12,700 for married couples. In other words, the standard deduction nearly doubles under the new tax plan. While this seems like a win for many taxpayers, there is a downside. Firstly, this tax reform is set to expire at the end of 2025, and the trade-off is that many personal exemptions are not eligible for deduction.

What does this mean? For many individual taxpayers, it will make the filing process a lot easier - fewer forms and calculations. More taxpayers will use the standard deduction and avoid the need to itemize their expenses.

The reform eliminates most itemized deductions. Those paying alimony can no longer deduct it, while those receiving it can. This change begins in 2018 for divorces signed as of January 1, 2018. The reform keeps deductions for charitable contributions, retirement savings and student loan interest. 

Have kids? Awesome, your child tax credit just went from $1,000 to $2,000! Plus, the threshold at which the credit begins to phase out is increased to $400,000 for married taxpayers filing a joint return and $200,000 for single, married filing separate or head of household taxpayers. Have children college age or under? The new law expands the use of 529 Plans to cover up to $10,000 of annual expenses for public, private or religious elementary and secondary schools. This can be a nice tax benefit for families who choose to put their children in private schools. Previously, this tax benefit was designated for college or higher education tuition and expenses.

Gone for the 2018 tax year are the deductions for: casualty and theft losses (except those attributable to a federally declared disaster), unreimbursed employee expenses, other miscellaneous deductions previously subject to the 2% AGI cap, moving expenses, employer-subsidized parking, and transportation reimbursement.  While some of these changes may affect you, and others may not, it is still advisable to seek the help, knowledge, and instruction of a licensed tax professional to proactively stay ahead of these changes (which, all go away after filing of your 2025 tax return, unless the reform changes are extended).  

The new law eliminates the penalty for individuals who do not have health insurance starting Jan. 1, 2019. However, note that the penalty is still in effect for the 2018 calendar year, and even when the penalty goes away, other aspects of the Affordable Care Act are still in place. Even when there is no penalty associated with not having health insurance, you should consider the financial implications of being uninsured.

Starting in tax year 2018, taxpayers can still deduct state and local income, sales and property taxes, though the deduction is capped at $10,000. The cap is $5,000 when filing as married filing separately.

For tax year 2017, homeowners who itemized their taxes were able to deduct their mortgage interest payments on mortgages up to $1 million. The new tax plan limits the deduction to mortgages up to $750,000. However, it is not retroactive. Meaning, homeowners who held their mortgage prior to the new tax guidelines will not be affected - but future buyers will be capped at $750,000.

There are also changes to the corporate tax rates and a new deduction for individuals who have "qualified business income" (QBI) from a partnership, S corporation or sole proprietorship. The new corporate tax rate is a flat 21% (prior-law graduated corporate rates were 15%, 25%, 34% and 35%). This rate isn't set to expire. There is a deduction of up to 20% of QBI when passed through to your personal return. This deduction is set to expire at the end of 2025 as well.

In a nutshell you can expect a shorter form 1040 in most cases. Say goodbye to 1040A and 1040EZ forms - about 150 million taxpayers are expected to use the same form. There are lots of new schedules that will require itemization - at least six. Some line items, like personal exemptions, have been eliminated because the corresponding tax items have been axed, and many existing line items have been consolidated.

The result? Not counting new schedules, signature spaces and tick boxes, the new 1040 has just 23 lines (the current form has 79). Did I mention the font? Get your magnifying glass ready - the font is small.

It is always a good idea to be prepared and understand your financial position. Consider meeting with your tax professional ahead of time, as they can explain tax reform as it relates to your particular situation, and create a plan that allows your money to work for you and your family.

Anthony Mauriello, E.A.   My Tax Fella – Mauriello Enterprises, Inc.
(718) 356-5178                www.mytaxfella.com

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