As much as taxes might not be on your mind with the merriment of the upcoming festivities, it’s not too soon to start thinking about filing your 2018 tax return.
When it comes time to file your 2018 taxes, be mindful of changes from the Tax Cuts and Jobs Act of 2017. “For instance, miscellaneous itemized deductions are no longer available, the personal exemption has been eliminated, the SALT (State and Local Tax) deduction has been reduced, and more. This will interfere with you bringing your total taxes down when filing your tax return, especially if you're in a higher tax bracket,” says Manisha Hansraj, a tax expert with Rapid Filing Services.
Joshua Escalante Troesh, founder of Purposeful Strategic Partners, believes 2018 will see a massive shift in how taxes are calculated for most Americans. “Not only did the recent tax reform bill adjust the tax brackets, but it also eliminated or limited most tax deductions and increased the Standard Deduction. As a result, the majority of people who previously itemized deductions will find the Standard Deduction now is a better deal.”
The big news is the change in the federal income tax rates. Thanks to the Tax Cuts and Jobs Act of 2017, there are some new rates, and for the most part they have gone down. As of January 1, 2018, rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent. In 2017, rates were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent The amount of tax you owe depends on your income level and filing status. The bottom rate remains 10 percent but it now covers more income.
Know that just because you move into a higher tax bracket, doesn’t mean that all of your income will be taxed at a higher rate. Instead, according to the IRS, only the money that you earn within a particular bracket is subject to that particular tax rate.
“Just because you fall into a certain tax bracket doesn’t mean all your income will be taxed at the same rate. Instead, your income will be divided into blocks. Let’s say you’re a single person making $25,000 a year. You’d pay 10 percent on the first $9,525 and the rest of your income will be taxed at 12 percent. Taking advantage of available tax credits and deductions can reduce your taxable income and put you in a lower tax bracket. As a result, you may owe less money,” says Starra Sherrin, a certified public accountant at ezTaxReturn.com. You can find detailed charts of income tax brackets and rates on the IRS’ website.
Also, be aware that personal exemptions have been eliminated. In 2017, you could claim $4,050.
Do keep in mind too, the standard deductions for 2018. If you’re single, it’s $12,000; married and filing jointly, $24,000, head of household $18,000. The change is about double the amount of 2017 deductions. This increase may make it harder for you to itemize deductions. There is an additional standard deduction for elderly and blind taxpayers, which is $1,300 for tax year 2018 and increases to $1,600 if you are also single.
Finally, adds Escalante Troesh, one of the unsung heroes of the tax reform bill is the massive boost to the Child Tax Credit. All but very high-income families can now claim the credit, and low-income families benefit more from $1,400 of the credit being a refundable credit (which is effectively a welfare provision). He says, “Tax credits are more valuable to taxpayers because they reduce your taxes dollar-for-dollar, while tax deductions reduce it only by your marginal tax rate. Low-income families benefit more due to their lower marginal tax rate.”