What is tax reform?
Major tax reform that affects both individuals and businesses was enacted in December 2017. It’s commonly referred to as the Tax Cuts and Jobs Act, TCJA or tax reform.
For 2018, most tax rates have been reduced. This means most people will pay less tax starting this year. The 2018 tax rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. In addition, for 2018, the tax rates and brackets for the unearned income of a child have changed and are no longer affected by the tax situation of the child’s parents. The new tax rates applicable to a child’s unearned income of more than $2,550 are 24%, 35%, and 37%. In addition to lowering the tax rates, some of the changes in the law that affect you and your family include increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, and limiting or discontinuing certain deductions. Most of the changes in this legislation take effect in 2018 for federal tax returns filed in 2019. It is important that individual taxpayers consider what the TCJA means and make adjustments in 2018 and 2019.
Will I get a refund?
The Tax Cuts and Jobs Act changed the way taxable income is calculated and reduced the tax rates on that income.
The U.S. tax system operates on a pay-as-you-go basis. Taxpayers must generally pay at least 90 percent of their taxes throughout the year through withholding, estimated or additional tax payments or a combination of the two.
The IRS issued new withholding tables for 2018 to reflect the changes in tax rates and tax brackets, the increased standard deduction and the suspension of personal exemptions, among other things. The IRS also reissued withholding tables, which show payroll service providers and employers how much tax to withhold from employee paychecks, taking into account each employee’s wages, marital status, and the number of withholding allowances they claim.
Will I owe?
Since most of the tax brackets were lowered with tax reform you will likely not owe as much Federal tax.
The standard deduction has also been increased.
The standard deduction is a dollar amount that reduces the amount of income on which you are taxed and varies according to your filing status. The standard deduction reduces the income subject to tax. The Tax Cuts and Jobs Act nearly doubled standard deductions. When you take the standard deduction, you can’t itemize deductions for mortgage interest, state taxes and charitable deductions on Schedule A, Itemized Deductions. Starting in 2018, the standard deduction for each filing status is:
Single…………………………………………………………..$12,000 …….(up from $6,350 in 2017)
Married filing jointly. Qualifying widow(er) …….$24,000 …….(up from $12,700 in 2017)
Married filing separately ………………………………..$12,000 …….(up from $6,350 in 2017)
Head of household…………………………………………$18,000 …….(up from $9,350 in 2017)
The amounts are higher if you or your spouse are blind or over age 65.
Most taxpayers have the choice of either taking a standard deduction or itemizing. If you qualify for the standard deduction and your standard deduction is more than your total itemized deductions, you should claim the standard deduction in most cases and don’t need to file a Schedule A, Itemized Deductions, with your tax return.
However, remember that the personal exemptions have been suspended.
So let’s compare two sets of hypothetical taxpayers in 2017 and 2018 to see that difference. Remember we are NOT taking into account any tax credits or other factors in these examples. We are simply looking at the difference in Standard Deduction amounts and the suspension of Personal Exemptions. ALSO, remember that most tax brackets are lower in 2018 so the amount of Federal tax should be less:
- TP1 and TP2 filed Married Filing Jointly with no dependents on their 2017 return. They claimed the standard deduction of $12,700 and two personal exemptions of $8,100 ($4,050 each). Thus they reduced their taxable income by $20,800.
- TP3 and TP4 filed Married Filing Jointly with two minor dependents on their 2017 return. They claimed the standard deduction of $12,700 and four personal exemptions of $16,200 ($4,050 each). Thus they reduced their taxable income by $28,900.
- TP1 and TP2 file Married Filing Jointly with no dependents on their 2018 return. They claim the standard deduction of $24,000 and cannot claim personal exemptions. Thus they will reduce their taxable income by $24,000.
- TP3 and TP4 file Married Filing Jointly with two minor dependents on their 2018 return. They claim the standard deduction of $24,000 and cannot claim personal exemptions. Thus they will reduce their taxable income by $24,000.
What can I do?
Just as the amount of your withholding has changed based upon the change in tax rates, you may also need to adjust your withholding or make estimated or additional tax payments due to other changes in the tax law. You should review your withholding in 2018 and make adjustments if there is still time this year. Review your withholding again, early in 2019 to make sure you don’t have too little or too much withheld from your paychecks next year.
It is recommended that you seek the advice of a qualified tax professional to ensure your withholding is correct.
Do you Have a Federal Tax Problem You Need Help With?
The Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic can consult with you to provide advice regarding your IRS tax problem, and/or potentially act on your behalf for FREE if you qualify for assistance (come to a clinic intake session)!
Jim Floyd is the Staff Enrolled Agent at the Neighborhood Christian Legal Clinic – Low Income Taxpayer Clinic. As an Enrolled Agent, Jim is a federally-licensed tax practitioner with unlimited rights to represent clients before the Internal Revenue Service. This means he is unrestricted as to which taxpayers he can represent, what types of tax matters he can handle, and which IRS offices he can represent clients before. Enrolled agent status is the highest credential the IRS awards.
Jim is also a member of The American Society of Tax Problem Solvers (ASTPS), a non-profit professional association of practitioners that specialize in representing taxpayers before the IRS and other taxing authorities. Membership in ASTPS reflects commitment to excellence and high standards in taxpayer representation
Source: Internal Revenue Service