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What to Expect When You File Your 2018 Taxes

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 StatusTax Year 2017 Standard DeductionTax Year 2018 Standard Deduction
Single$6,350$12,000
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:

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/.

Planning for Today and Tomorrow: 529 Plans

Written by: Andy Collado, Financial Coach, The Financial Clinic

Want to know the secret to financial success for you and your children? Goals. As a financial coach, I have seen countless families turn their finances around simply by focusing on a forward thinking, strengths-based, and most importantly, passionately held financial goal. One of the most common motivators is the desire to provide a better future for our children, a better foundation for their success. The best way to do this is with sound educational planning.

Degrees equal dollars. That statement rings true in two important ways for our children’s futures. Unemployment rates for high school graduates are almost double ( 5.2: 2.7) that of Bachelor’s degree holders, and they make almost half of the median weekly earnings ($692: $1156). Over a lifetime, this difference rings up at a whopping million dollars. These gains come with costs of course: college tuition, room and board, textbooks, and so on. These costs have also risen astronomically faster than both inflation and income in the past 30 years. Suffice to say, higher education is getting more costly and yet more necessary with every passing school year. By using strategic and advantageous savings vehicles such as 529 plans, we can lower our current financial risk while increasing our children’s earning potential.

529 College Savings Plan, named for the associated section of the IRS Tax Code, are tax-advantaged savings plans specifically for educational expenses. Up until 2017, they could only be used for higher education, or college, costs but recent tax code changes have opened up the qualified withdrawals to include tuition and fees for K-12 programs as well.  But why should you choose 529s over other investment or simple savings vehicles? Let’s take a look. The benefits of a 529 include:

  • Your contributions will grow tax-free and withdrawals will be distributed tax-free for any “qualified” expense, which includes tuition, fees, room and board for college students, books and other supplies.
  • 34 states allow for a hefty amount of your contributions to a 529 to be deducted from your taxable income. In New York State, single filers can deduct up to $5,000 and couples filing together can deduct up to $10,000.
  • Contributions in a 529 account can be withdrawn to use at any school regardless of which state the 529 was opened in.

Children with as little as $1 – $499 in savings are three times more likely to attend and four times more likely to graduate college, so even if you don’t consider the amount you can realistically put into a 529 to be substantial, even one or two small deposits can make a huge difference in your child’s life.  Any amount gets them closer to their educational goals, and making regular contributions doesn’t have to mean cutting into every paycheck. Because contributions can come from anyone, not just the account owner, you can also boost the balance of your 529 by allowing friends and family to contribute for special occasions such as a birthday, or by putting a portion of your tax refund directly into the account.

We know that education is important. We also know that it can be expensive. If a 529 account sounds like it might be a good option for you (hint: if you have someone in your family with educational expenses, it most likely is something to consider!) there are few simple things you can do to get started:

  1. Research the 529s available in your state or with financial institutions you trust.
  2. Speak with a financial coach to talk through yours and your children’s goals to figure out the best way to utilize one of these accounts. (If you are in NYC, you can schedule an appointment with one of our free financial coaches, or check to see if we can connect you to a partner in your region you with this link!)

Finally, are you worried that the money will potentially be wasted if for some reason your child decides not to go to college?  Let’s say they become the next Silicon Valley college dropout billionaire, hall of fame basketball player, or they just go out and get themselves a full ride, leaving the contributions in their 529 without purpose; what happens then? Well, another great benefit of 529 plans is the ability to change the beneficiary to anyone, including yourself. So if they are off creating the next new addictive FinTech product or dunking on anyone except the NY Knicks, you can head back to school and take that pottery class you always wanted to take or learn a second language. It’s a win-win, today and tomorrow.