Hello everyone! After the busiest tax season I’ve ever had, I am finally re-adjusting to life outside my office walls. I had to reintroduce myself to family and friends after being holed up for months, but other than that, I would consider it a successful season.
The last time I wrote an article, I discussed in detail the main changes under the new tax law signed by the President on December 22, 2017 (see 2017 Tax Cuts and Jobs Act). New tax brackets have been introduced, certain deductions/credits have been increased, while others have been reduced or eliminated, and several other modifications have gone into effect (some retroactively).
While having a general knowledge of the changes under the Tax Cuts and Jobs Act (TCJA) of 2017 is important, it’s also necessary to have an understanding of how the new law will impact you personally. Will the changes reduce your tax liability or possibly increase it starting in 2018? The short answer to that question is that there is no short answer. Every individual/family will be impacted differently depending on a wide array of factors: household income, number of children/dependents, whether or not you own a home and have a mortgage and/or pay property taxes, as well as several others.
The best way to illustrate this point is to use two different examples to show how each family’s tax liability will be affected from 2017 to 2018:
Family A: Married Couple with 2 children age 16 and under, household income of $150,000, itemized deductions of $30,000 in 2017.
Family B: Married Couple with no children, household income of $75,000, itemized deductions of $25,000 in 2017.
There could be additional factors that would affect each family’s tax bill under the new law, but for illustration purposes, we will keep the figures fairly basic and straightforward. Look at the difference in Family A’s tax liability from 2017 to 2018:
Child Tax Credit
Net Tax Liability
Tax Savings in 2018: $3,149
Now, let’s look at the effect that the TCJA has on Family B:
Tax Savings in 2018: ($263)
So, why does Family A benefit so significantly while Family B sees a slight disadvantage under the new rules. As I mentioned, there are several factors that can sway the outcome one way or the other with respect to the tax liability a household will incur in 2018. In this case, Family A benefitted from a couple of particular changes:
- The tax rates for each bracket have been lowered. For example, the 25% marginal bracket (within which Family A falls) is now the 22% bracket. The percentage that is taxed on income is lower and therefore the tax liability is less.
- The child tax credit is now $2,000 per child instead of $1,000 in 2017. On top of that, whereas this credit previously was phased out for a married couple earning over $110,000 ($55,000 for single filer), that limit is now $400,000. So, more people will benefit from this credit moving forward.
So, why would Family B see an increase in their tax liability, especially with the lower tax rates in 2018? Well, there are a couple factors that come into play:
- The IRS has done away with the personal exemptions. So, whereas each household member received a $4050 deduction in 2017, this couple would lose $8100 (2 total exemptions) in deductions in 2018.
- One positive change under the new law is that the standard deduction was increased from $12,700 in 2017 for married couples to $24,000 in 2018. In cases where a family was taking the standard deduction previously, this increase will more than make up for the loss of the personal exemptions. But, since this couple was already claiming $25,000 in itemized deductions, they see no benefit from this increase, and only experience the negative effect of the removal of the personal exemption.
So, as you can see, there are a variety of factors to consider when determining whether the new tax law will reduce your overall tax bill for 2018 or if you may perhaps see an increase to your liability. The best way to determine the effect of the TCJA on your household is to consult a tax professional to conduct a thorough review for you. It’s best to be well-informed regarding the impact of the new law in order to avoid any surprises - positive or negative - when you go to file your 2018 return.
In addition to having a better understanding of how the new tax law will impact your tax liability, there are other steps individuals and families should consider taking in order to elude any potential issues. As individuals adapt to the new tax rates, it’s vital to understand that employers are also making adjustments to how they withhold taxes from their employee’s income. With tax rates being lowered essentially across the board, unless a worker changes their exemptions on their withholding form (IRS Form W-4), it’s very likely that less money will be withheld from that individual’s paycheck. You may very well have already noticed you are getting back more money each pay period than last year, and not just if you received a raise. This is a result of the new withholding tables under the new Tax Law.
For some people, this won’t really make a large difference. If they expect to owe less in taxes in 2018, then it won’t necessarily be a detriment to have less withheld. But, say you were in the same situation as Family B discussed above, where the new law in fact results in an increase in your tax liability. If your company withholds less money, but you actually owe more, you could be in an unfavorable position when you go to file your 2018 tax return.
On the flip side, if you are someone that likes to maximize the amount of their take home pay without getting a large refund – generally speaking, a wise strategy – then maybe the new tax law actually triggers a larger refund than you would like. Some might say this isn’t a bad problem to have, but if you’re struggling to meet your monthly budget for example, you might rely on maximizing your paycheck without creating a year-end liability.
In either case discussed above, it would be wise to have a tax professional review your withholdings in conjunction with an analysis of your 2018 tax liability to make sure you’re having the proper amount of taxes taken out of your paycheck. This is definitely a unique year given all of the modifications set forth in these newly issued tax regulations. So, it is more critical than ever to make sure you are not only well-informed about the Tax Cuts and Jobs Act and the new rules set forth, but to also adjust your tax strategy accordingly if need be.
In the coming weeks, I will be sharing various strategies and tips for maximizing your tax efficiency under the new law for 2018. But for now, I at least wanted to address the importance of understanding how the Tax Cuts and Job Act of 2017 could affect you and your family. Please feel free to contact my office at 410-451-4029 or via email at [email protected]. Thank you!
(Correction to article posted on January 3, 2018- I stated that the Individual Health Care mandate has been permanently repealed. While this is true, this doesn’t take effect until after December 31, 2018. Therefore, the mandate is still in place for the 2018 tax year.)