Tax reform impacts the tax outcome for many Americans – including families. Fortunately, however, many of the changes can potentially boost the tax savings for busy moms and dads.
Learn how the new laws could impact your tax situation if you’re a parent or legal guardian.
Elimination of the personal exemption
Yes, the personal exemption is no longer available for 2018.
In previous years, you could reduce your taxable income by $4,050 for yourself, your spouse, and your dependents. For families of four, that equates to $16,200. But in 2018, it’s zero.
And while that may seem like a startling loss, that’s not the end of the story. There are a variety of other new tax benefits that may outweigh the value of the personal exemption depending on your situation. Read on.
The Expanded Child Tax Credit = $500
The maximum child credit doubled in 2018 to $2,000 per child under age 17. Additionally, up to $1,400 of that credit is now refundable. That means any unused portion of the $1,400 will come to you as part of your tax refund. The income limit for the credit also expanded, which allows many families who previously didn’t qualify for the credit to now take advantage of it.
If you have dependents age 17 or older, you’re not completely out of luck. There is a new $500 credit for students up to age 23 and non-child relatives who live with you and meet other requirements. For example, a child away at college, but whose permanent home is still with you, is considered to be living with you for dependent purposes.
Larger standard deduction for families
As always, you can itemize your deductions or claim the standard deduction, whichever is larger. For 2018, the standard deduction for each filing status increased dramatically, meaning far more families will claim the standard deduction rather than choose to itemize. The new standard deductions are:
- $12,000 for single filers (up from $6,350)
- $24,000 for joint filers (up from $12,700)
- $12,000 for married filing separately (up from $6,350)
- $18,000 for heads of households (up from $9,350)
If you didn’t itemize before, or if you had a moderate amount of itemized deductions, the increase in the standard deduction may help you. It could result in a significantly lower tax bill.
Limited deduction for state and local taxes
To put it simply, the state and local tax deduction (SALT) is now limited to $10,000 per return ($5,000 if you are married filing separately). That means families can deduct any state and local taxes, including property tax, up to $10,000 on their return. Get more specifics here.
Tightened rules for mortgage interest deduction
As part of the Tax Cuts and Jobs Act, families can no longer deduct interest on home equity indebtedness unless they used the loan to buy, build, or significantly improve their home. The loan also must be secured by your home.
Additionally, you can now only deduct interest on up to $750,000 of mortgage acquisition debt you incur to buy or improve a first or second residence (down from $1,000,000).
Source : TaxAct Blog