Note: Before altering your tax strategy, it’s important to sit down and consult with your tax specialist. They have a firm understanding of your wants and needs, as well as the knowledge of tax law required to maximize your wealth potential.
Have you fully digested the tax code changes brought forth by the Tax Cuts and Jobs Act? With the April 15th tax filing deadline approaching, it is important to understand how these reforms may affect your tax bracket, deductions, credits and more. Below, we’ll take a look at some of these key tax code adjustments and discuss the impact they’re likely to have on your return and your wallet.
Restructuring of Tax Brackets
The total dollar amount of your annual taxable income for 2018 will place you into one of seven specific brackets, each taxed at a set rate. New tax laws lowered five of these seven tax brackets. Based on this restructuring, many taxpayers may now fall into a lower bracket. See which new tax bracket you’ll fall into based on your filing status and annual taxable income by accessing TurboTax’s free online tax bracket calculator (available to everyone, not just TurboTax subscribers).
Standard Deduction Increases
Another substantial change to tax reform includes a nearly two-fold increase in the amount of the standard deduction. The standard deduction is a set dollar amount the IRS permits taxpayers to deduct from total taxable income. If you are single, your standard deduction will jump from $6,350 for tax year 2017 to $12,000 for 2018. The standard deduction for married couples filing a joint return increased from $12,700 to $24,000.
Unlike a standard deduction, some taxpayers instead opt to itemize deductions. You cannot do both, so you must select the route which offers the highest tax break for your situation. We’ll expand on this below, but a few examples of common itemized deductions are home mortgage interest, contributions to charity and property taxes.
So what does all of this mean to your 2018 tax return? Based on the standard deduction increase, many more taxpayers will experience a higher tax break by going this route instead of itemizing deductions. However, since all household tax situations vary considerably, you’ll need to take a hard look at the numbers for both options to find the best route for your unique circumstances.
Restrictions on Itemized Tax Deductions
Under the reformed tax code, several previously authorized itemized deductions were eliminated or reduced significantly. Some of these major changes include:
- State/local and property taxes: Unlike previous tax years, recent changes now cap the combined total amount of property, sales and state/local income tax you can deduct at $10,000. Previously, these items were fully deductible.
- Moving expenses: Under the new tax law, household moving expenses are no longer deductible. The only exception applies to members of the military relocating to a new duty station.
- Interest on home mortgages: New homeowners may deduct mortgage interest paid on a home mortgage loan up to $750,000 of a loan’s principal value. However, existing homeowners who secured mortgages prior to December 15th, 2017, may continue to deduct mortgage interest paid on a home mortgage loan valued up to $1 million.
- Alimony payments: Previously, alimony payments were deductible for the payer, but taxed for the recipient of the funds. The new law eliminates the deduction for the payer and ends the need for the recipient to claim the funds on a tax return.
In addition to the changes above, tax reform eliminated a wide range of other miscellaneous deductions, including:
- Tax preparation fees
- Expenses incurred while job hunting
- Investment advisory fees, investment-related expenses and more
Increases in Child Tax and Dependent Credits
Despite the reduction or elimination of several itemized deductions, tax credits for families rose considerably under the new rules. These credits, unlike deductions, directly reduce the amount of taxes you may owe the IRS, or your tax liability.
Specifically, the reformed tax code doubled the existing credit per qualifying child below the age of 17 from $1,000 to $2,000. $1,400 of these funds can also now be applied directly toward your actual tax refund amount. You’ll find detailed requirements for the 2018 Child Tax Credit in IRS publication 972. The new law also delivers a $500 credit for each dependent you claim other than a qualifying child. Therefore, you could claim a credit if you have children over the age of 17 or elderly relatives living under your roof.
Decreases to Thresholds for Qualifying Medical Expenses
Many taxpayers may benefit under new laws which lower the qualifying threshold for medical care expenses. This threshold drops from 10 percent of adjusted gross income (AGI), or the portion of your income which is taxable, to 7.5 percent. For example, if your AGI falls at $50,000, you can deduct qualified medical costs over $3,500 (7.5 percent of $50,000). Remember, you can only claim these expenses if you itemize your deductions. These qualified medical expenses may include:
- Dental and vision care
- Preventative medical treatments
- Prescription medication costs
- Cost of medical equipment (contacts, glasses, false teeth, etc.)
- Travel costs to seek medical care including bus fare, parking fees and more
For a comprehensive list of tax-deductible medical costs, check out IRS publication 502, Medical and Dental Expenses.
Do your homework this year to make sure you fully grasp the impacts of the revised tax laws on your return. Armed with the latest information, you can make informed choices to maximize your refund or minimize the amount of taxes you owe the IRS. If in doubt, don’t hesitate to consult with a professional tax advisor who can help walk you through the process and recommend the best tax filing strategies for your unique situation.
Quorum offers for you
Nominal Savings? No Way.
Give your savings the boost it deserves. Choose between the flexibility of a liquid, HighQ Savings account or the peace of mind that comes with our term account's fixed rate.
We think you rate highly, too,
We've kept your term account (CD) rates high because you rate highly with us. It's just another way we're saying thank you for being a valued member of Quorum. Lock in a great rate—and peace of mind—with a Quorum Term Account.