Highlights of the 2018 Tax Reform

What should I know and what’s important for me as an average taxpayer? What things should I keep track of for 2018 & 2019? Should I have someone prepare my return this year? Am I really going to be saving money? If you've asked any of these questions, this article is for you. Let's take a look at some of the changes and how they will impact us, the taxpayers.

Many taxpayers are under the impression that they will receive a larger refund than they have in the past. Although some may receive a higher refund, this is not entirely true for everyone. Those that used to itemize their deductions probably have the most concern of receiving a lower refund or possibly even owing taxes. However, the new tax reform truly does benefit so many taxpayers in various ways, not necessarily because they are receiving larger refunds but because the standard deduction has been increased and the tax brackets have been adjusted.

WAIT... TAX BRACKETS HAVE BEEN ADJUSTED?! Yes, let me show you. The first bracket listed is for Single Taxpayers. The left side of the chart is showing the 2017 taxable income and taxes rates, and the right side shows the 2018 taxable income and tax rates.

Notice the percentage drops from 15% down to 12% and the income taxed at the level is increased a bit. There is another 3% decrease from 25% down to 22% and even a 4% decrease for those that were in the 28% bracket before. Things get a little interesting between the 32% - 35% and then another 2.6% drop just over the $500,000 mark. So if we aren't all automatically receiving larger refunds, then how did all of the changes really benefit us? As you can see from the tax rates, many people are paying less of a percentage in tax. What you don't see behind the scenes is that the payroll income tax rates have also changed. In short that means that your paycheck is larger since less of your income is being taxed at the end of the year when you file your taxes. So yes, the refund may be less when you file your taxes in 2019, but the overall tax amount you paid for the should also be less if your tax situation hasn't changed from year to year.

Filing your tax return is a financial reconciliation of the taxes you paid for the year. It's telling you how well you did with your money all year. In a way, it's similar to balancing a checkbook but in a VERY BIG way.

When people file a tax return, they're basically checking in with the government to see if they paid what they were supposed to for that calendar year based on their tax situation. If they paid too much, they get some back. If they didn't pay enough, they owe the difference plus or minus any credits or deductions that the tax code allows them. Sometimes these credits and/ or deductions allow them a larger refund than what they paid through the year.

Standard Deduction Amount

Speaking of deductions, let's take a deeper look at what has happened with the deduction that every taxpayer qualifies for - the standard deduction. You'll notice in the chart below that the amounts have practically doubled from last year. Some of you may be wondering what a standard deduction is and why it's important. The standard deduction is a dollar amount that is given to offset your income. In 2018, if someone who is single makes $50,000, they will be able to deduct $12,000 off of their income before their tax is computed. Although they made $50,000, they will only be taxed on $38,000.

Exemptions

While it is true that the personal and dependent exemptions amounts are no longer a deduction on the tax return, the amounts of the exemptions have increased from $4,050 in 2017 to $4,150 for 2018. The significance of the exemption amount is imperative to determine dependency when a child is no longer a student. It's possible that an individual who lives in your home and makes under $4,150 can be claimed as a dependent on your tax return.

Other Dependent Credit - $500

That leads us right into a new credit that the tax reform is offering to taxpayers. Many people are familiar with the child tax credit. That wonderful credit that parents with children under 17 have received back since 1998. When tax time rolls around, all parents dread the loss of this extra credit the day that their child turns 17. No more! There is a new credit that taxpayers will receive in the amount of $500. It is limited to the taxpayer's tax liability and income, but as long as the taxpayer meets the qualifications to receive the credit, they will be able to save a bit more money!

Child Tax Credit - up to $2,000

Alright and since we talked about the other dependent credit, let's discuss what has changed with the child tax credit. From 2017 to 2018, the possible amount of child tax credit has doubled from $1,000 to $2,000. The refundable portion of the child tax credit is limited to $1,400 which means even if the taxpayer has no tax liability, they can still receive a refund of $1,400 from the child tax credit. Previously single taxpayers had to have Modified adjusted gross income under $75,000 ($110,000 for married joint taxpayers) to take advantage of the full child tax credit. For 2018, single taxpayers have an expanded threshold of $200,000 ($400,000 for married joint taxpayers) before they lose a portion of the full tax credit. This opens up the opportunity for so many taxpayers to take advantage of this awesome credit, saving themselves even more tax dollars.

Health care

There is a mix of good and bad, the best news is there is more good news than bad news. Okay, that's just confusing... On we go. The bad news is those who did not have health insurance for all of or some part of 2018 will still be subject to the penalty unless they qualify for an exemption from the penalty (that's part of the good news). The penalty is the larger of $695 per individual (up to a maximum of $2,085) or 2.5% of household income, after subtracting the taxpayer’s applicable standard deduction. The penalty is prorated by month if they had the insurance for a portion of the year. However, there is light at the end of the tunnel. The good news is starting 2019, there will be no penalty for not having qualifying health insurance. It's also good to note that those who have insurance through the Marketplace will still need to reconcile the amount of credit they're receiving against their health insurance premium.

Itemized Deductions Schedule A Remember the days when we could write-off all the property taxes paid in one tax year? Well.. not anymore.. The state and local tax (SALT) deduction is now limited to $10,000. That’s right, the combined amount of your state taxes from your paycheck AND your property taxes paid on your home are now limited to $10,000.

Even though the property taxes paid is limited, mortgage interest on your primary home will still remain deductible. Please note, for mortgages taken out after December 14, 2017, only the interest on the first $750,000 will be deductible. Interest on home equity loans IS still deductible as long as it is (1) below the limitation combined with any other loan secured by the main home (2) secured by the main home and used to buy, build, or improve the main home.

For 2018, miscellaneous deductions that were subject to the 2% of AGI (adjusted gross income) limit will no longer be considered when filling out the Schedule A.

These items include:

· Unreimbursed employee business expenses, such as travel and transportation, meals and incidentals, entertainment, gifts, union dues, tools, supplies, clothing, education, subscriptions, job search, and business use of home

· Safe deposit box rental

· Tax preparation expenses

· Investment expenses

· Hobby expenses

· Not-for-profit rental expenses

Medical expenses threshold is 7.5% of your AGI. Unless something changes, it will be 10% of your AGI for 2019. The medical mileage rate for 2018 is $.18 per mile, up from the 2017 rate of $.14 per mile.

With the increased standard deduction amounts for Federal as well as the new limitations on the taxpayer's allowable itemized deductions, many taxpayers will probably benefit more by claiming the standard deduction. Since we are in California, it may benefit many California taxpayers to claim the standard deduction on their Federal return while still being able to itemize on the State side.

For 2018, the standard deduction amount for California are as follows: - Single or Married filing separately - $4,401 - Married filing jointly, Head of household, or Qualifying widow(er) - $8,802

If you find that your itemized deductions are above the California standard deduction amounts, it will be a huge tax savings for you to itemize with the adjustments made on the California return.

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Essentially what has happened is the tax code has been simplified, eliminating many complicated scenarios. People are paying less over all in income taxes when they compare year to year, they are qualifying for more credits, and they are receiving more money in their paycheck rather than waiting a year for the refund.