What's New With Your Income Tax in 2018
Disclosure: MyLife Financial, LLC is not a Certified Public Accounting firm nor are any of its representatives Certified Public Accountants. You should seek tax advice from your tax professional to adjust for any changes in tax legislature and your personal situation.
Woo hoo!! We are a week removed from the tax deadline of our 2017 income tax and to some of our luck, we got an extension for 1 day. Now we are past the first quarter of 2018 and well on our way into the second quarter. So what does this mean for us in terms of income taxes for 2018? Will you pay more or less? The answer is "it depends" as always but let's take a look at some of the changes that have occurred.
NEW TAX BRACKETS
The same amount of tax brackets are still there, seven. But the brackets have changes. For the most part, they have gotten lower and have expanded to include people in lower brackets. Unfortunately, this is not true for all. Single taxpayers earning more than $157,500 to $191,650 will have a higher tax burden.
NO MORE PERSONAL EXEMPTION
In the previous year, any individual and their dependents were allowed an exemption of $4,050; this means out of whatever your income was minus adjustments and deductions you could still exempt $4,050 times number of dependents from your income. Well not anymore.
The Bad: The new tax law has done away with this exemption. Larger families may see a higher tax bill.
The Good: Not to worry, the standard deduction has INCREASED!
INCREASED STANDARD DEDUCTION
That's right. The standard deduction has doubled. Before, every taxpayer filing was allowed to take the standard deduction of $6,500 ($13,000 Married Filing Jointly). For 2018, every taxpayer filing will have a $12,000 standard deduction ($24,000 Married Filing Jointly).
The Bad: It does not fully make up for taking away the personal exemption from individuals. Take a family of 4 for example. In 2017 they would have 4 personal exemptions ($16,200) and a Standard deduction for say, a married couple ($13,000) totaling $29,200 in exemptions and deductions. In 2018, the same family would have a standard deduction of $24,000.
The Good: Increasing the standard deduction will certainly simplify taxes so this should lower tax prep fees for a lot of folks. Also, if you were one that scrounged around looking for receipts or ways to qualify for higher itemized deductions, you may have just saved yourself a lot of time and effort.
WHAT ABOUT THE CHILD TAX CREDIT
The child tax credit for 2018 has been increased from $1,000 to $2,000. In addition, the refundable portion has been capped at $1,400, an increase from last year. Also, the threshold to qualify for the credit has increased from last year's $75,000 to $200,000 for individuals ($110,000 to $400,000 Married Filing Jointly). Once you make more, the credit phases out.
The Bad: This still does not make up entirely for the lost personal exemption. The same family of 4 mentioned above would now have a standard deduction of $24,000 and a Child Tax Credit of $4,000.
The Good: More people will qualify for the Child Tax Credit. For higher income earners with larger tax burdens, they will finally get some tax relief.
THE PASS THROUGH DEDUCTION
For small business owners that are sole proprietors, an LLC, partnership, and anything considered a "pass through entity," you will now be able to deduct 20% of your income before you pay ordinary income tax on it.
The Bad: You STILL have to pay self-employment tax on this income. There are also limits to this deduction depending on the industry and service you are in.
The Good: For some time now, I have seen small business owners spend more at the end of the year to get more business deductions. They go to extra conferences, more dinners, more promotional items are ordered, etc... Now small business owners will be able to keep more of their earnings in their pocket!
WHAT DEDUCTIONS ARE GOING AWAY?
A few are going away. The ones that stand out to me most are moving expenses, tax preparation fees, and unreimbursed employee expenses.
What I Think: Tax prep fees aren't a big deal for most since the average tax prep fee for individuals is around $200-$300. It really hurts small business owners since their fees are higher.
What I Think: Moving expenses are a big deal for people relocating for work-related reasons. I know I took advantage of this when I moved from San Antonio, Texas back to McAllen, Texas to start my business. It was nice for the IRS to acknowledge that it was an investment in my future.
What I Think: Unreimbursed employee expenses are a big deal here in South Texas. Taking this deduction away especially affects oil rig workers, construction workers, and truck drivers. They'll have to look closely at what their per diem will be when working these jobs and learn to negotiate pay with future employers.
AND OBAMACARE PENALTIES?
These will also go away but not until 2019. The penalty will be $695 per individual or 2.5 percent of the household income, whichever was greater.
MyLife Financial is a fee-only, virtual financial advisor providing objective and independent advice. Our clients are busy professionals that face daunting questions of how today's financial decisions will affect their long-term financial success. Everything written is strictly for informational use only. Please seek the advice of your CPA, Attorney, or financial professional before implementing any strategies.
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