The New Tax Law: How to Be Prepared

Most tax reform bills affect a few people. Some bills may affect many people. This is the first tax reform bill most of us can remember that drastically changes the way every taxpayer in America has his or her tax liability calculated.

The changes that will probably affect the most people are the increase in the standard deduction, elimination of personal exemptions, changes to mortgage interest rules, limitations on state and local tax (SALT) deductions, lowering of tax rates in all brackets, and increases in credits for children and other dependents.

Whose taxes are most likely to go up under the new tax rules?

Those taxpayers who were taking unlimited deductions for sky-high taxes in expensive locations such as New York and parts of California could see significant increases in their tax liability. The higher a taxpayer’s income, the more likely they are to be affected by this rule. Married couples are also more likely to be hit by this limitation, because the $10,000 per year deduction limit is per tax return. (Filing separately won’t help – the limitation is $5,000 per year for married taxpayers filing separately.)

If you could previously reduce your taxable income significantly with itemized deductions, and you also claimed several personal exemptions, you may find that you now pay more in tax. That’s because the new, larger standard deduction is partially compensated for by the loss of personal exemptions. However, the net result may not be as bad as you fear, if you qualify for the larger child tax credit or the new credit for dependents.

A newly divorced person who can no longer deduct alimony will pay substantially more income tax than under the old system. The rules only apply to divorce decrees that go into effect after December 31, 2018. It is assumed that divorce settlements will take the new rules into consideration and reduce the amount of alimony to make up for the change in tax rules.

If your home equity loan does not qualify under the new rules because you did not use the proceeds to buy, build, or substantially improve your home, you may lose that interest expense deduction.

Whose taxes are most likely to go down under the new tax rules?

If you didn’t itemize deductions in previous years, your taxes will most likely be reduced in 2018. In fact, most taxpayers in low and middle income brackets will pay less in income tax, thanks to the new, higher standard deductions and slightly lower tax rates for each tax bracket.

If you have qualified children under age 17, the enhanced child tax credit can lower your tax bill. In fact, the $2,000 per child credit may benefit you more than the personal exemptions that lowered your taxable income in previous years. This is especially true if you are in a low or middle income tax bracket.

If you have dependents who are too old for the child tax credit, such as older children or parents, you may be able to take the new dependents credit of $500 per person.

A divorced person, whose divorce was settled after December 31, 2018 and who receives alimony, will pay less in income tax than under the old system, all else being equal. They may receive less in alimony under current settlements, however, to make up for the change in tax laws.

The tax rates went down slightly in all tax brackets for 2018. All else being equal, this should benefit every taxpayer.

What can you do to lower your tax bill for 2018?

Knowing how the new laws work is the first step to reducing your total tax liability. Here are a few tips that may get you started, depending on your situation.

  • Rethink tax planning in light of lower income tax rates. Many financial decisions are based on net effect after income tax. With lower rates at every level, it’s a good time to look at questions such as whether you should use a Roth or traditional IRA, for example, or if federal tax free municipal bonds are a good fit for you.
  • Plan for state and local tax limitations. Now that your itemized deductions for state and local taxes (SALT) are limited to $10,000 per return ($5,000 if married filing separately), high non-federal taxes are all the more painful. Consider strategies to lower your state and local taxes, such as selling high-taxed real estate or even moving to a more tax friendly area.
  • Make the most of your mortgage interest deduction. The new rules for mortgage interest deductibility mean you have to be a bit more careful how you structure your loans. Instead of paying down your mortgage and then taking out a HELOC, for example, you might want to continue paying your regular mortgage payments and save up to pay for larger expenses. If you plan to improve or add on to your home, make sure your financing plans meet the criteria for deductibility.

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Source : TaxAct Blog

The New Tax Law: How to Be Prepared

Most tax reform bills affect a few people. Some bills may affect many people. This is the first tax reform bill most of us can remember that drastically changes the way every taxpayer in America has his or her tax liability calculated.

The changes that will probably affect the most people are the increase in the standard deduction, elimination of personal exemptions, changes to mortgage interest rules, limitations on state and local tax (SALT) deductions, lowering of tax rates in all brackets, and increases in credits for children and other dependents.

Whose taxes are most likely to go up under the new tax rules?

Those taxpayers who were taking unlimited deductions for sky-high taxes in expensive locations such as New York and parts of California could see significant increases in their tax liability. The higher a taxpayer’s income, the more likely they are to be affected by this rule. Married couples are also more likely to be hit by this limitation, because the $10,000 per year deduction limit is per tax return. (Filing separately won’t help – the limitation is $5,000 per year for married taxpayers filing separately.)

If you could previously reduce your taxable income significantly with itemized deductions, and you also claimed several personal exemptions, you may find that you now pay more in tax. That’s because the new, larger standard deduction is partially compensated for by the loss of personal exemptions. However, the net result may not be as bad as you fear, if you qualify for the larger child tax credit or the new credit for dependents.

A newly divorced person who can no longer deduct alimony will pay substantially more income tax than under the old system. The rules only apply to divorce decrees that go into effect after December 31, 2018. It is assumed that divorce settlements will take the new rules into consideration and reduce the amount of alimony to make up for the change in tax rules.

If your home equity loan does not qualify under the new rules because you did not use the proceeds to buy, build, or substantially improve your home, you may lose that interest expense deduction.

Whose taxes are most likely to go down under the new tax rules?

If you didn’t itemize deductions in previous years, your taxes will most likely be reduced in 2018. In fact, most taxpayers in low and middle income brackets will pay less in income tax, thanks to the new, higher standard deductions and slightly lower tax rates for each tax bracket.

If you have qualified children under age 17, the enhanced child tax credit can lower your tax bill. In fact, the $2,000 per child credit may benefit you more than the personal exemptions that lowered your taxable income in previous years. This is especially true if you are in a low or middle income tax bracket.

If you have dependents who are too old for the child tax credit, such as older children or parents, you may be able to take the new dependents credit of $500 per person.

A divorced person, whose divorce was settled after December 31, 2018 and who receives alimony, will pay less in income tax than under the old system, all else being equal. They may receive less in alimony under current settlements, however, to make up for the change in tax laws.

The tax rates went down slightly in all tax brackets for 2018. All else being equal, this should benefit every taxpayer.

What can you do to lower your tax bill for 2018?

Knowing how the new laws work is the first step to reducing your total tax liability. Here are a few tips that may get you started, depending on your situation.

  • Rethink tax planning in light of lower income tax rates. Many financial decisions are based on net effect after income tax. With lower rates at every level, it’s a good time to look at questions such as whether you should use a Roth or traditional IRA, for example, or if federal tax free municipal bonds are a good fit for you.
  • Plan for state and local tax limitations. Now that your itemized deductions for state and local taxes (SALT) are limited to $10,000 per return ($5,000 if married filing separately), high non-federal taxes are all the more painful. Consider strategies to lower your state and local taxes, such as selling high-taxed real estate or even moving to a more tax friendly area.
  • Make the most of your mortgage interest deduction. The new rules for mortgage interest deductibility mean you have to be a bit more careful how you structure your loans. Instead of paying down your mortgage and then taking out a HELOC, for example, you might want to continue paying your regular mortgage payments and save up to pay for larger expenses. If you plan to improve or add on to your home, make sure your financing plans meet the criteria for deductibility.

Let's block ads! (Why?)

Source : TaxAct Blog