What to Know About 2018’s Income Tax Changes
How This Year’s Tax Changes May Impact You — and How to Set Yourself Up for 2019
If you’re nail-biting nervous about what this tax season will mean for your bank account, just as you are during any Hail Mary at a Super Bowl, know that you’re not alone on this one.
The new tax law — officially known as the Tax Cuts and Jobs Act (TCJA), a major tax overhaul that passed in 2017 and went into effect this January — will impact everyone. But whether that impact will be positive or negative to you isn’t as simple to figure out, especially if you’re more gridiron genius than tax whiz.
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Whether you’re crunching the numbers yourself (bravo!) or you have a tax professional doing the dirty work (yes, please!), it’s wise to approach your taxes with a firm grasp of how things are different this year and, looking ahead, with an idea of what you can do over the next 12 months to reap more benefits next tax season.
Robert Fishbein, a vice president at Prudential who leads tax and legislative functions in the corporate tax department, breaks down the good and the bad to help calm nerves.
“There are estimates out there that roughly 65 percent of taxpayers are going to do better under the new law,” he says, sighting a report last year by the Tax Policy Center that suggested the remaining 29 percent will do about the same and six percent will do worse. “So when you look at that from a macro perspective, most people are going to do better.”
First, chill. Here’s some good news about the tax changes.
Maybe you’ve seen the headlines about how refunds are down. Fishbein believes those stories are slightly misleading. “What you really have to look at is your overall tax liability,” he explains. “To determine whether your position is improved or harmed, and you know some people have been getting that increased amount that is available to them under the new law in less withholding over the course of the year.”
Is that you? Bust out your calculator and find out.
“When you look at the tax law itself, generally across the board people will be paying one to two percent less in almost every income level,” he adds. “So that’s obviously a good thing.”
Another positive, he says, is that the standard deduction is increased by a large amount, basically doubled from $6,350 for a single individual and $12,700 for a couple last year. “So for single individuals it’s going to be $12,000, for married couples $24,000,” he points out. “What that means is that of fewer individuals are going to have to itemize their deductions.”
If you’re a single guy, you’ve got to get to that $12,000 mark before you even need to itemize, listing each deduction that you quality for. “That’s really one of the nice things about the new law and an estimate there is that 25 million people are not going to have to itemize their deductions anymore because of these new rules, these higher standard deductions,” he says.
There may be fewer itemized deductions, but if you’re a self-employed worker, things could be potentially looking up for you. “[Let’s say] you have a business lunch or business expenses. That’s not an itemized deduction. That goes against your business income and that is still available,” Fishbein explains. “That’s not been curtailed. In fact, there are some parts of the self-employed space that have presumably gotten a little better under this law.”
Self-employed workers may benefit from the new pass through deduction. “It’s basically a new deduction of 20 percent of their income. It’s a very complicated new rule and we’re still getting guidance on it and there are some restrictions depending upon what field you work in, but most self-employed workers are now going to get this in addition to the lower rates that I talked about,” he says. “They are going to get an additional deduction, so they should certainly be aware of that.”
Another really good thing about the new law, Fishbein says is what he calls a stealth tax or the alternative minimum tax (AMT). The exemption amount has increased to $70,300 for singles and $109,400 for married couples.
“It’s a tax that you have to calculate, and there’s your regular tax liability and then there’s this alternative minimum tax liability — and guess what?” he says. “You get to pay the higher of the two, but the new law has really changed and diminished the impact of this alternative tax and they’ve done that by increasing the exemptions, so basically if you’re single you have to make over $70,300 before you’re subject to it. And if they’re married, it’s $109,400.”
Fishbein adds to the positivity by saying, “the estimate here is around 5 million taxpayers who used to have to pay this tax are no longer going to be subject to this calculation.”
Feeling good? Take a breath and understand what’s not so good about the tax changes.
Beginning this year — and this is a big one concerning families — personal exemptions for family members and dependents are no longer available. “You can look at it as the trade off for the higher standard deductions and the lower rates,” says Fishbein.
Additionally, a lot of miscellaneous itemized deductions you used to be able to take as deductions are no longer available. “Tax return preparation, job hunting expenses, cost of safe deposit box, those types of things. You don’t get those deductions anymore,” he says. For a full list of expenses you can no longer deduct, see the IRS website.
The new law caps your deduction for state and local taxes at $10,000, which will affect people in high tax states especially. “That’s been all over the headlines. That’s really going to hurt folks in [states such as] New York, New Jersey.”
But he counters, “You need to look at the overall mix of the good and these less favorable provisions and kind of put it into the blender and then see whether or not you’re going to be benefitted.”
These are painful realities that will be tough for many taxpayers to swallow. “From a macro perspective, most people are still going to pay less under this new law,” he adds. “Again not to say that individuals in a particular position they have a lot of itemized deductions that they’re losing, they may end up in a worse position.”
What to Do for Next Year
OK, so you’ve heard the good, the bad, and likely know where you stand — apologies if that place is downright ugly. But hey, here’s what you can do to help reap more benefits in the future, because thinking ahead is always a good idea.
“Because of the limitations on itemized deductions, one strategy that people are deploying now is to think about multiple years,” Fishbein says. He uses charitable deductions as an example.
“Let’s suppose you’re in a $12,000 standard deduction and you have deductions of $10,000, included in that you make a charitable gift of $3,000. You might think about, ‘What if I didn’t make that gift this year? So now I only have $7,000.’ Next year you double your gift to $6,000, now you’re over the $12,000.”
You could benefit if you bunch your charitable deductions or think about a strategy over multiple years. “It might be that you can itemize every other year,” he says. “So that kind of strategy is a new thing as a result of the tax law.”
It’s also important to note that nothing lasts forever, including the individual provisions in this new tax law, which expire at the end of 2025 and “former higher income tax rates come back into play,” he notes.
“What does that mean? It means you might think about doing things before the law reverts, [like] converting traditional IRA funds to a Roth IRA,” he says. “You could think about making contributions to a Roth 401K rather than a traditional 401K. The traditional IRA, the traditional 401K, that’s pretax money. You might want to put it into the Roth form of those — the Roth IRA or the Roth 401K — because you’re paying tax now at a lower rate and so why not incur that tax liability now at the lower rate, rather than later.”
Plan for a Bright Financial Future
There are ways to find success in this realm. Fishbein says, “I always kind of divide it into you’ve got to get ready, you’ve got to get help, and you’ve got to think long term.”
D’oh on you if you didn’t prep for all the 2018 changes last year leading up to tax season, but life happens. Learn from your mistake and do what you can now to change what happens next year.
“The getting ready means, are you paying the right amount [of estimated tax] so that you don’t have a penalty when you go to file next year?” he advises. “Tracking all of the deductions that you’re entitled to over the course of the year is really critical.”
Also critical, as you can clearly see with all the changes, is that you get help sorting everything out if you need it.
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“There are a lot of tools out there where self-employed individuals, I think about the self-employed individuals not having that support from the employer. The employer can help you fill out your W9 so that you’ll have the right amount withheld,” he says. “You don’t have that if you’re self employed. You’ve got to figure that out on your own.”
He encourages folks to think about resources available to them, like tax preparation software, for instance, and Prudential’s new tool, LINK by Prudential, which as he describes it, helps you think about your financial position.
“There’s [other] software that helps you actually do the things, like prepare your return. LINK by Prudential helps you think about your position and plan better,” he says. “Then there’s the personal help, the accountant, the financial advisor.”
Finally, as illustrated in the strategies above, it’s always wise to think long term — in terms of life insurance, retirement, and, of course, taxes — to help ease the blow that’s dealt this time of year.
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This post was syndicated from askmen.com