What to know before you file your taxes
What you need to know about the new tax code, and how the changes affect you
When you file your income taxes this year, be prepared for several changes — a single, shorter 1040 tax form, new tax brackets, and an increase in the standard deduction that may eliminate the process of itemizing deductions.
Supporters of The Tax Cuts and Jobs Act, which was signed into law in December 2017, said the law aims to simplify taxes and lower tax rates. Here are some key changes and how they might affect your wallet.
You might find yourself in a new tax bracket
The tax bracket thresholds have changed, so your taxable income might fall under a different tax bracket this year. For example, if your family’s taxable income last year was $77,400, you were in the 25 percent bracket. This year, you’d be at the bottom of the 22 percent bracket, effectively paying less tax.
Jeremy Glines, an instructor of accounting and taxation at Southern New Hampshire University and the director of the SNHU Volunteer Income Tax Assistance (VITA) site in Manchester, said this is good news for most families because it means they will owe less to the federal government.
Although falling from the 25 percent to the 22 percent bracket appears to be a three percent savings, Glines explained that it’s important for filers to understand that you don’t pay 22 percent tax on your earnings. Instead, you pay 10 percent on the first $19,050 plus 12 percent on the amount between $19,050 and $77,400, 22 percent tax on income earned between $77,400 and $165,000 and so on.
The chart below shows the differences in the 2017 tax brackets compared to this year’s brackets.
The standard deduction has nearly doubled
If you aren’t a fan of itemizing your deductions or you have little to itemize, the increase in the standard deduction this year might significantly reduce your taxable income.
For example, couples who are married and filing jointly could deduct $12,700 last year; this year they are able to deduct $24,000. Single-parent families benefit, too, as the standard deduction has also nearly doubled to $12,000 in 2018 from $6,320 in 2017.
While you still have the choice to itemize expenses such as property tax, mortgage interest and charitable contributions, itemizing will not benefit you if your standard deduction is higher than all your total itemized deductions. (If you think there is a chance they may be, you can file a Schedule A form, itemizing all your deductions.)
But while the standard deduction has increased, the new tax code no longer includes personal exemptions, which used to reduce your taxable income. For example, you can no longer claim a personal exemption for yourself, spouse or your dependents. (The exemption amount in tax year 2017 was $4,050 per person, subject to a phaseout at higher income levels.)
A family of four could deduct $16,200 last year in personal exemptions, which they cannot do this year — hence the increase in the standard deduction, Glines said.
The Child Tax Credit has also doubled
If you have children, you’ll get double the tax credit for each of them this year. The child tax credit doubled from $1,000 per child to $2,000 per child. It’s important to remember that the child tax credit is not a tax deduction, but an actual reduction in your tax bill — even if you don’t owe Uncle Sam.
Alex Talcott, managing partner of Seacoast Tax Services and an instructor at the University of New Hampshire’s Peter T. Paul College of Business and Economics, said that even if families do not owe taxes, they can still get back $1,400 of the $2,000 tax credit per child.
“It’s a good example of how the tax code incentivizes behavior. It favors child-rearing and home ownership,” he said.
Families can also receive a new $500 credit for other dependents other than children such as college students or older relatives in your household, according to the IRS.
Deductions on property, state, and local income taxes max out at $10k
In New Hampshire, it’s not unheard of for families to pay more than $10,000 in property taxes on their homes, which they used to be able to itemize and deduct in full. Now, the deduction limit for all combined state, local, and property taxes is capped at $10,000.
With the standard deduction now up to $24,000 for married joint filers, most New Hampshire families may not be affected much by the new cap; homeowners filing in California, New York, and New Jersey — all states with a combination of high property, state income, and local income taxes — will feel more of a pinch, Talcott said.
For some families, it will still make sense to itemize before deciding whether to take the standard deduction.
Here are some things you can still itemize, according to the IRS:
• Mortgage loan interest on your main home or second home for homes up to $750,000 (married, filing jointly)
• Property, state, and local income taxes up to $10,000
• Unreimbursed medical and dental expenses if they exceeded 7.5 percent of your adjusted gross income
And what you can’t:
• You can no longer itemize many miscellaneous expenses — such as moving expenses, uniform allowances or car registrations. Small contributions to charities may also not make sense to deduct, as they might not be enough to exceed the standard deduction. Finally, tickets to college athletic events are no longer considered charitable deductions, according to the IRS.
• If you pay alimony to a former spouse, you many no longer reduce your adjustable gross income for any divorce executed after Dec. 31, 2018. For example, if you made $100,000 and paid alimony to a spouse in the amount of $20,000, this is the last year you would only pay taxes on the $80,000, Glines said.
You can still get credit for child care expenses — including summer camp — for up to $3,000 for one child, or up to $6,000 for two or more children under age 13, depending on your income. It’s not a deduction, but a credit that reduces the amount of federal income taxes you owe, which can in turn increase your refund.
It still benefits your family to pursue higher education, according to Glines. The American Opportunity Credit is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. (Eligible students must be enrolled at least half-time for at least one academic period and must be pursuing a program leading to a degree or other recognized credential.) Up to $1,000 of the credit is refundable.
If you or your dependents don’t qualify for the AOC, you can still take advantage of the Lifetime Learning Credit, a credit of up to $2,000 for qualified education expenses paid for all eligible students included on the taxpayer’s tax return. There is no limit on the number of years the lifetime learning credit can be claimed, and the student does not have to enroll in a minimum number of hours to claim the credit.
Ultimately, it pays to save
One of the easiest ways to reduce your tax burden to is to sock money away and reduce your taxable income this year or never pay taxes on principal and growth again, said Talcott. For 2019, the IRS raised the ceiling for 401(k) contributions (up $500 to $19,000). The income limits for eligibility for Roth IRA contributions (paid with after-tax contributions) rose. Individuals under 50 can contribute up to $6,000 each annually starting in 2019, so $12,000 per couple if they are making $199,000 or less (“adjusted” gross income). The IRS continues to use the tax code to encourage Americans to save, Talcott said.
“Most of our clients who also work with the allied Seacoast Financial Planning do so on a monthly basis; it’s automated for them, they live within their means, and they get to take advantage of dollar-cost averaging through systematic investments, so they’re not picking a ‘right’ time of the year to buy in,” he said.
The 1040 tax form will look very different, shrinking from 79 lines to 23. But it will also come with additional forms — many of which won’t affect those filing simple tax returns. Still, many filers feel more comfortable with software or preparers who can walk them through the process.
Glines encourages filers to first look at the IRS’s Free File electronic filing system, which takes preparers through the 1040 form step-by-step. If you are completely overwhelmed, commercial tax preparers can be more knowledgeable, but also cost more money. There are also popular commercial tax filing programs — such as TurboTax — that can help you prepare and file your taxes for a fee, Glines said.
If you have a simple tax return and made less than $55,000 this year, you can get your taxes prepared for free at the VITA in Manchester or one of the other New Hampshire VITA sites, Glines said. At the VITA sites, volunteers certified with the IRS provide free assistance to filers and can even help non-residents on educational visas with their returns.
To learn more, visit www.irs.gov.
Krysten Godfrey Maddocks is a former journalist and marketing director who now regularly writes for higher education and technology organizations in New Hampshire and Massachusetts. Mom to 4-year-old Everett, she has lived in the Seacoast for the past 20 years.