By Darren Liddell | Director of Program Innovation | The Financial Clinic
Happy Tax Day! The heart of 2018’s tax season is almost over and as Volunteer Income Tax Assistance (VITA) programs begin to wrap up this tax season and prepare for next year, there are many tax changes on the horizon.
In late 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). The TCJA marks a shift in tax law that will both negatively and positively impact the taxpayers who come to VITA sites. These shifts include changes to tax brackets, the reduction of some tax credits and deductions, and increases in others. You may be wondering what you need to do to prepare for next tax season and how these new changes in tax law will impact you and your family. Let us bring some clarity to the changes for you.
What you need to know as you close out your 2017 return:
- First, if you have yet to file your 2017 tax return, please keep in mind that the new tax bill changes do not affect your current year’s (2017) tax return.
- One of the most important things to keep in mind for tax year 2018 is that health insurance is still a requirement. If you do not have health insurance in 2018, you may have to pay a penalty on your 2018 tax return. This will be treated the same as this year’s taxes, including some exemptions for certain taxpayers who qualify. In 2019, the health care mandate will be eliminated.
Key changes that will take place when you file your 2018 tax return:
- The way that the IRS calculates many deductions and credits will change. Most notably, the standard deduction will be larger (see table 1 below), however, personal exemptions ($5,400 per person claimed on you return in 2017) have been eliminated. Additionally, if you have non-child dependents, you may qualify for a new $500 per person credit. What does all of this mean for you? See the paragraph below for information on who will be most impacted by the changes.
- Table 1:
|Filing Status||Tax Year 2017 Standard Deduction||Tax Year 2018 Standard Deduction|
|Married Filing Jointly||$12,700||$24,000|
- If you have children under age 17, you may qualify for a larger Child Tax Credit that will increase your refund, however, if your children do not have Social Security Numbers, you will no longer be able to claim the Child Tax Credit. This will significantly reduce tax refunds for families of children with ITINs.
- Your tax bracket, which determines how many dollars in taxes you are responsible for paying throughout the year, may change.
- If you are self-employed, the amount of income tax you are responsible for may be reduced because of the changes in the new tax bill regarding pass through businesses. However, it’s important to note that self-employment tax will not be reduced.
- One of the most important behind the scenes updates in the tax bill is a change in the calculation of interest by the IRS. Over time (it will take 5-10 years for customers to really feel the changes) tax break thresholds will rise slower and all numbers adjusted for inflation by the IRS will be less. So, some individuals eligible for deductions and credits will lose their ability to benefit from the tax cuts if they make above $12,000-$24,000, depending on their filing status.
Recommended action steps to prepare for the 2018 tax season:
- Use the IRS’s new withholding calculator to make sure you are having the correct amount of taxes withheld from your paycheck. Your most recent pay stub and 2017 tax return may be helpful in completing the calculator.
- If you need help completing or updating your W-4 or planning your taxes for next year: Schedule an appointment to meet with one of our financial coaches.
- Read the Prosperity Now One Pager on How the New Tax Law Affects your Return.
Taxes are immensely personal and the impact of these changes will vary based on your income, household size, number of children, and eligible tax credits. The biggest benefits to low- to moderate-income households will be the increase in the refundable portion of the Child Tax Credit – $1,400 (post-tax reform) compared to the $1,000 refundable portion of the Child Tax Credit from 2017’s “old” law, which could potentially mean a larger tax refund for customers with children 16 and under. Those with small businesses may pay less in income taxes. The amount of small business taxes should remain about the same, and in the short-term, small business owners will pay fewer taxes than in recent years.
The biggest losses to low-to-moderate-income households include the elimination of the personal exemption, which will affect parents and multi-generational families with dependents over the age of 17, and those taking care of elderly parents. These households will end up paying more in taxes when these new rules go into effect. The decreased impact of itemization due to the increase in the standard deduction and the elimination of some prior itemized deductions will make many ineligible for itemization. Those eliminated include casualty and theft losses (except those attributable to a federally declared disaster), unreimbursed employee expenses, moving expenses, and employer-subsidized parking and transportation reimbursement. The Joint Committee on Taxation estimates that 94% of households will claim the standard deduction in 2018, up from about 70% now. Finally, while most customers are expected to receive higher refunds and pay less in the tax year 2018, many of the tax changes that benefit individuals are set to expire between now and 2025, meaning that unless those provisions are extended, most moderate-to-middle income taxpayers should expect to be paying a lot more in taxes 5-10 years from now.
Still need to complete your taxes? To find a free tax site near you please call 311 or visit irs.treasury.gov/freetaxprep/.