If you ask people whether they think the Tax Cuts and Jobs Act of 2017 helped them or cost them more money, you may hear different answers.
If they recently filed their taxes, the foremost thing in their minds may be whether they got a tax refund or not and whether that refund is more or less than the check they got last year. But, that’s not the whole story.
Your total tax bill is more important than your refund
The tax withholding tables changed in February of 2018, and many employees started getting more money in each paycheck because they had less income tax withheld. It’s easy to get used to a slight bump in a paycheck, and not even realize how much it adds up over the year. However, when you file your 2018 taxes, you may have a smaller refund or even have to pay some tax – even if in some cases you are paying less tax for the year than you would have without tax reform.
As fun as it is to get a big tax refund at the end of the year, we should all care more about how much we pay in total income taxes for the year than about how much we get back when we file our tax returns.
Here’s how you can tell how tax reform really affected your total tax bill:
1. Compare your taxes owed for 2017 vs. 2018
If your tax situation hasn’t changed much from year to year, you can compare how much tax you actually paid with Form 1040 for each year and decide how the new tax law is affecting you.
For 2017, your total tax after credits, and including other taxes such as self-employment tax, is on Form 1040, page 2, line 63.
For 2018, your total tax after credits, and including other taxes such as self-employment tax, is on Form 1040, page 2, line 15.
Compare your total tax from each year. There’s a good chance you actually got a tax cut for 2018. According to the Tax Policy Center, about 80 percent of taxpayers received a tax cut under the new tax laws.
2. Compare on a “what if” basis
Did you encounter any significant life changes in 2018? For example, if you got a new job or sold some property at a substantial gain, comparing your tax bills from 2017 and 2018 doesn’t really tell you much. The changes in your financial situation between the two years probably affected your tax bill more than the new tax law did.
In that case, there’s no quick and easy way to see what you would have paid if the new tax law had never gone into effect. If finding out is important to you, you could always enter your basic 2018 data into one of TaxAct’s 2017 products and see how much your tax bill would have been. Be sure to name this “what if” file in such a way that you won’t accidentally file it with the IRS.
3. These provisions may cause you to pay more or less in tax
You may pay less in tax under the new tax law if:
- You didn’t normally itemize deductions. The standard deduction has just about doubled for every filing status. The taxpayers who didn’t usually itemize, or who itemized but didn’t have total itemized deductions of much more than the standard deduction, gain the most from this change.
- You have children under age 17 at the end of the tax year. The Child Tax Credit is now $2,000 per child, up from $1,000 before the new tax law.
- You qualify for a credit for other dependents. You can no longer take a dependency exemption, but you may receive a new tax credit for older children and other dependents of up to $500 per dependent.
You might owe more tax under the new tax law if:
- Your State and Local Tax Deduction is limited. Your total deduction on one tax return is now limited to $10,000 ($5,000 if married filing separately).
- Your Mortgage Interest Deduction is limited. Under the new law, if the mortgage that you took out after December 15, 2017 is more than $750,000, you can only deduct mortgage interest on the first $750,000 of your loan.
- Your home equity loan interest is no longer deductible. You cannot deduct interest on home equity lines of credit (HELOCs), unless you used the money to buy, build, or substantially improve your home. That is true even for HELOCs that were taken out in previous years.
Source : TaxAct Blog