December 22, 2017, marked the day when the tax bill was signed into law by President Trump. Several of the tax changes went into effect in January 2018. However, these changes won’t affect US tax filers’ 2017 tax returns. Whether you e-file taxes or go the other way, the Trump tax reform is going to impact what you file. Here are some major things you should know before planning your 2018 returns:
1) Number of tax brackets remain the same
Though the tax reform initially considered reducing the number of tax brackets in the federal income tax system from seven to four, the final version of the bill continues to have seven brackets. However, the new brackets have changed rates of 12%, 25%, 35% and 37%.
Interestingly, earlier the highest rate, i.e., 39.6% applied to single taxpayers earning $418,401+ and married couples earning $470,701+. In 2018 returns, however, the highest rate, i.e., 37% will apply to single taxpayers earning $500,000 and married couples earning $600,000+.
2) You may not want to itemize deductions
According to a report, around 30% of taxpayers choose to itemize deductions. If you’re one of them, you must know that the new bill has cut down many deductions and personal exemptions. Further, the bill has also doubled the standard deduction for non-itemizers. Thus, itemizing may not be the best way to go for many. You can approach an advanced tax filing service to figure out what works for you.
3) Say goodbye to Individual State and Local Tax (SALT)
Earlier, tax filers could deduct all State and Local Taxes with a certain limit imposed on high-earners. Now, individuals can’t deduct more than $10,000 of a combination of state and local property taxes, and either sales or income taxes from their federal taxes. In areas with high SALT (California, Massachusetts, New York, etc.), taxpayers may be affected in various ways, depending on their individual situations.
4) Lower tax rates on business income from pass-through entities
The tax bill’s most complex impact will be on pass-through entities, which constitute 95% of businesses in the United States. Owners of such entities, i.e., sole-proprietorships, partnerships S corporations & LLCs, will now be able to deduct 20% of “qualified business income (“QBI”).” QBI consists of qualified income, gains, deductions, and losses for the business. This deduction has been put in place to help capital-intensive businesses, based on the idea that their income is less like earned individual income.
5) Having kids will help you save more
As of now, the child care tax credit is up to $1,000 per child. Under Trump’s new tax plan, this credit has been doubled to $2000 for children under 17. The tax reform has also made changes regarding who can avail the credit. For single filers, taxpayers can claim full credit if their income is upto $200,000 (up from $75,000 currently). Married couples can do so if they earn up to $400,000 (up from $110,000 currently). Further, the adoption credit continues to be worth up to $13,750 per child.
The above information is what will broadly define how you file your taxes for 2018. However, the reform’s impact can vary across each filer, depending on their personal situation. Don’t let this confuse you; we can help. Email us at firstname.lastname@example.org for a free 30-minute consultation.