2018 Tax Reform Bill: What You Need to Know from Financial Professional, Cathy DeWitt Dunn
President Trump’s tax reform, the Tax Cuts and Jobs Act (TCJA) passed last December, and that has left a lot of Americans with questions about how the new law will affect their taxes for 2018. The good news is the 2018 tax reform bill reduced tax liability for many Americans, and you may have already noticed a slight increase in your take home pay.
Here’s what you need to know about 2018 tax reform bill:
Tax brackets and marginal tax rates have changed. Not only have tax brackets (the ranges of income and their corresponding tax rates) changed, but nearly all marginal tax rates were also cut. This is why many Americans will have lower income tax rates on the same income in 2018. For example, a married couple filing jointly in the $75,901-$153,100 tax bracket in 2017 was taxed at a rate of 25 percent. For 2018, that tax bracket changed to $77,400 – $165,000 and is now taxed at a rate of 22 percent.
The shift in tax brackets also effectively removed the tax penalty for married filers. In 2017, some married couples filing jointly were pushed into a higher tax bracket when they combined incomes, increasing their tax liability. In 2018, the new brackets for joint filers is double that of the single filers, so the marriage penalty is eliminated.
The standard deduction has nearly doubled. In a move to help simplify tax filing for most Americans, the standard deduction has almost doubled in the 2018 tax reform bill. That means fewer U.S. taxpayers will need to itemize their deductions. In 2017, the standard deduction was $6,350 for the single filer and $12,700 for joint filers. In 2018, the standard deduction is now $12,000 for single filers and $24,000 for joint filers. The personal exemption was eliminated, but this doesn’t necessarily have the negative effect we might assume it would.
A married couple with no dependents and a combined income of $100,000 filing jointly in 2017 received $8,100 in personal exemptions in addition to their $12,700 standard deduction, reducing taxable income to $79,200. In 2018, without the personal exemption but with the increased standard deduction, that same couple’s taxable income is now $76,000.
Child tax credit has changed. Many more parents of children under age 17 will see an increase in their child tax credit on their 2018 taxes thanks to the 2018 tax reform bill. Under the previous tax code, parents making less than $110,000 filing jointly, or $75,000 filing individually, received a $1,000 child tax credit for each qualifying child under age 17. With the 2018 tax reform, the credit doubles per child, and the income limits were also increased to $400,000 jointly and $200,000 individually.
In addition to these major changes, the 2018 tax reform also brings changes for the 529 college savings plans, homeowners, the Alternative Minimum Tax, SALT deduction, estate tax exemption, charitable donations, medical expenses, the Affordable Care Act, and more.
With numerous changes in place, now’s the time to act on your finances to get the most out of the 2018 tax reform. Start by checking your withholding. Since you’re likely now in a new tax bracket, you’ll want to be sure you’re not withholding too much and giving the government an interest-free loan. Adjust your withholding to find that “sweet spot,” where you come as close as possible to your actual tax liability for the year and essentially break even when you file your next tax return. Use the IRS calculator to help you determine how much you should be withholding.
Next, consider increasing your savings. Since more than 90% of households will get a tax cut this year, this is a great chance to bump up your retirement contributions. Start saving an additional one or two percent in your 401(k) or IRA. You haven’t had this money before so you won’t miss it! Your ultimate goal is to be saving 10 – 15% of your salary in your retirement accounts, and this can get you on your way.
If you have any questions about the 2018 tax reform bill or the financial moves you should make, sit down and talk to your financial professional and a tax professional to see what’s best for your situation. Contact Dewitt & Dunn today.