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Recent Tax Changes That May Affect You

Recent Tax Changes That May Affect You

The Tax Cuts and Job Act is the most crucial series of amendments to the US tax code in a few decades. The vast majority of the amendments will come into effect in the 2018 fiscal year, the statement you will file with the IRS in the spring of 2019.

Here is a summary of what Americans should know about the recent tax changes that may affect taxpayers in the upcoming tax season. Alterations performed on the corporate side will not affect the tax return, so that we will focus on the single filer. These changes, required by the new tax law applicable to individuals, will expire in 2025 if they are not extended. (The commercial modifications made by the bill are permanent).

Tax brackets: still seven, but at different rates

One of the major changes brought by the Tax Cuts and Job Acts was the general reduction in US tax rates. Although the number of tax rates remained at seven, prices generally declined, except that the minimum tax rate remained at 10% for the poorest Americans.

In addition to lowering tax rates, income limits were raised, particularly at higher tax levels. In other words, higher tax levels now apply to fewer Americans (with higher incomes) than before. For example, before the approval of the Tax Cuts and Job Act, the maximum tax rate was 39.6% and applied to couples who filed a joint return that reported more than $480,050. With tax reform, this maximum rate has been reduced to 37% and applies only to couples whose taxable income exceeds $600,000, with revenue well above that previously achieved.

The annual adjustments will be different

Prior to the fiscal year 2018, inflation adjustments for tax quotas, standard deductions, and other tax provisions were based on the CPI-U (consumer price index for all urban consumers). This index follows a basket of goods and services that affect a typical US residence. Therefore, it makes sense to use it to increase the number of your taxes over time gradually.

The new tax law uses a metric called a chain CPI, which means that if a good or service becomes too expensive, consumers will start buying a cheaper alternative. Without further discussion of the related CPI, the effect is that the index increases more slowly over time than other forms of CPI.

This is a relatively subtle change and is unlikely to have a visible impact year after year. However, the gradual increase in the CPI over time can have a significant impact on inflation adjustments in the tax code for decades. In simple terms, this long-term effect means that higher taxes will begin to apply to low-income taxpayers because real inflation (in theory) will increase faster than the level of income from marginal tax brackets.

Higher standard deduction

The TCJA almost doubled the standard deduction compared to previous levels. Taxpayers can choose to use standard or itemized deductions. Deducting the deductions means adding all the individual tax deductions to which you are entitled and subtracting them from the adjusted gross income (AGI). (Note: Adjusted gross income is total income less some adjustments. Regular income adjustments include traditional IRA contributions and interest on student loans, to name a few.)

In contrast, the standard deduction is simply a fixed amount that Americans can choose to deduct. Taxpayers can use one of the two most beneficial methods for them.

Most American families use the standard deduction so that this change will affect millions of people.

As a result of this change, many Americans end up using the standard deduction for their 2019 tax returns when filing tax returns for the 2018 fiscal year. Historically, about 70% of personal tax returns used the standard deduction while the other 30% found the details more advantageous. For 2018 and subsequent years, experts predicted that approximately 95% of personal income tax returns would now use the standard deduction.

The personal exemption is gone

To be clear, although the standard deduction is almost doubled, it does not mean that people get double the tax exemption, far from it.

Although the standard deduction has increased, the valuable personal exemption has disappeared. In addition to reducing taxes, parliamentarians have tried to simplify the tax code. As a result, instead of providing taxpayers with a standard deduction and a series of exemptions, these two elements were combined to form a larger standard deduction.

An individual exemption is a certain amount of income that Americans can exclude from taxable income each year. In previous years, Americans could claim a personal exemption for themselves, their spouse, and one for each employee.

In fiscal 2017, any personal exemption consisted of a tax deduction of $4,100.  For example, a couple with six dependent children can apply for eight personal exemptions. You can see that the highest standard deduction cannot be a gift, especially for larger families.

The child tax credit doubled

Although families with more children may feel the need to withdraw their exemption, there is good news. Not only has the child tax credit increased, but now the bulk of the credit is refundable, and the income restrictions are much less restrictive.

In short, it is essential to remember that a loan is very different from a deduction. Although a deduction reduces the amount of income the government intends to tax, a tax credit effectively reduces the amount of tax owed, dollar by dollar. If you have $1,000 in taxes, it will give you a $1,000 credit, whereas a deduction would reduce the level of income that your tax rate will apply to. In other words, a loan of $1,000 is worth more than a deduction of $1,000.

Tax reform has been positive for the child tax credit, which has doubled to $2,000 per eligible child under age 17. This amount is refundable up to $1,400, which means that it can be claimed even if the taxpayer's taxes are already zero. Therefore, also, if a parent has a low income or no federal income tax, he can still benefit from this money and get it back.

Also, income elimination thresholds are significantly higher than previous levels, making the loan more widely available to Americans than in past years. More tax exemptions go beyond certain income levels. The reason is that many tax benefits seek to benefit low to moderate taxpayers, not the rich. However, the number of people eligible for juvenile tax credit has increased considerably.

Mortgage interest is always deductible, but the mortgage deduction is one of the most popular tax cuts in the United States. Indeed, tax cuts such as these are often the main reason why Americans decide to buy a house. Luckily for several homeowners, the mortgage interest deduction has survived the tax reform efforts, but it has undergone two significant changes.

First, the limit (or cap) of the total allowable deduction has been reduced to an interest of up to $750,000 on qualifying residential debt or the principal mortgage of a principal or secondary residence. This amount is lower than the previous limit of $1 million, although loans obtained before December 15, 2017, are exempt from the upper limit.

Second, the previous additional limit was removed, allowing taxpayers to deduct up to $100,000 in interest on the equity in the home. To be sure, interest on a stock loan (such as HELOC) can still be used as a deduction, but only if the loan has been used to improve your home substantially. In this case, it becomes an eligible residence debt and is recorded in the limit of $750,000.

Charitable contributions

The deduction of charitable donations is another extremely popular tax exemption and has never actually been before the courts. Extremely generous taxpayers can now deduct donations representing up to 60% of the AGI, an increase of up to 50%.

A possible negative change, however, is that regular donations to colleagues and universities in exchange for the right to purchase sports tickets are no longer deductible.

What tax deductions have disappeared?

As we have seen, many tax deductions have survived the adoption of the Tax Cuts and Job Act, in its previous or amended form. On the other hand, some are not in the books. Keep in mind that the goal of the tax reform was not only to reduce taxes but also to simplify the US tax code. As part of the simplification, several deductions have been removed.

Here are the most significant tax cuts that Americans can no longer benefit from:

  • Moving expenses: this is a line deduction, which means that it can be deducted, whether the taxpayer specifies it or not, and is designed to offset the costs of moving expenses. Now this deduction has disappeared, except for some movements related to active military service.
  • Loss of accidents and theft: If your house has been stolen, you can deduct in advance the value of stolen property. The deduction can now only be used for losses attributable to a disaster declared by the federal government.
  • The category "miscellaneous deductions": represents a real simplification of the tax code. There was a long list of deductions that Americans could exploit because they exceeded 2% of the AGI. This includes items such as unpaid employee taxes, tax preparation fees, and so on. As of the fiscal year 2018, these deductions have disappeared; therefore, some taxpayers who pay for many of these expenses may be affected.

Which tax exemptions remain the same in 2019?

As I said, many tax exemptions have been preserved unscathed by the tax law and have reduced the workforce. This article is not exhaustive, but here are some deductions for taxes and credits that are not concerned:

  • capital gains and qualified dividend taxes
  • Child Care and Dependent Credit
  • Opportunity Credit in the United States
  • Credit for lifelong learning
  • Deduction of interest on student loans
  • Tax deductions for social security

Will these changes expire after 2025, or will they be made permanent?

The Tax Code will be subject to considerable uncertainty after 2025. As the Tax Cuts and Job Act is established, the changes to the corporate portion of the Tax Code are permanent, but individual tax changes generally expire later in the Fiscal year 2025. The most significant exception is the transition from the CPI-W to the chained CPI related to the calculation of inflation: it is a permanent variation.

Here's the problem, if the tax changes expire as expected after 2025, and our tax code returns to its former state, the calculation of lower inflation will raise taxes even more than before for most Americans.

At present, constant efforts are being made to bring about permanent change (legislators refer to it in the context of "tax reform 2.0"). However, with a divided Congress, every additional bill should face a fierce battle.

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