FREQUENTLY ASKED QUESTIONS ABOUT THE NEW TAX LAW
From lowered income tax rates and doubled standard deductions, to caps on mortgage interest and state and local deductions, Americans may feel a significant impact as a result of the new tax law. Here are 10 things individual taxpayers need to know:
1. Are the new tax rates lower?
Yes, taxpayers will still fall into one of seven tax brackets based on their income - 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The income ranges for each bracket have also changed significantly, so most taxpayers will see a reduction in their marginal tax rate. Most individual provisions in the new legislation are set to expire at the end of 2025.
2. I heard the standard deduction increased. Is that true?
The new regulations have increased the standard deduction by nearly double — from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for joint filers. The higher standard deduction may mean a decrease in itemizing deductions for charitable gifts, medical expenses, home mortgage interest, and more for many individuals, however, this decision should be discussed with Aaron during your appointment.
3. What about personal exemptions for myself and my dependents?
Personal exemptions, deductions used to reduce taxable income, generally were allowed for taxpayers, spouses, and any dependents. Effective beginning in 2018, the deduction for personal exemptions is suspended.
4. Is there a cap on state and local tax deductions, including real estate taxes?
The sum of the itemized deductions for state and local real property taxes, state and local personal property taxes, and state and local income or sales taxes may not exceed $10,000 ($5,000 for married individuals filing separate returns). The deduction for foreign real property taxes is suspended through 2025. The $10,000 limitation does not apply to foreign income taxes paid, or real or personal property taxes paid or accrued in carrying on a trade or business.
5. Can I still deduct interest paid on my Home Equity Loan or Line of Credit?
Yes, but only if the home equity debt was incurred to buy, build, or substantially improve the home that secures the loan. Home Equity interest that is used for other purposes or that does not meet the definition of acquisition indebtedness is no longer deductible. However, in certain instances, home equity interest paid on loans used for trade or business purposes is also deductible.
6. What is the new Qualified Business Income Deduction? Am I eligible?
The Tax Cuts and Jobs Act (TCJA) added a new tax deduction for owners of pass-through entities (S-Corporations, Partnerships, and Sole Proprietorships) – a 20% deduction of qualified business income (QBI) from a qualified trade or business. This new provision may potentially lower the maximum individual tax rate of 37% on pass-through income to 29.8%, which makes it more comparable to the new C corporation tax rate of 21%. However, the new law contains limitations that may reduce or eliminate the deduction for some business owners. This is a very complicated deduction and you should rely on Aaron to guide you through all the ins and outs.
7. Personal exemptions were eliminated, what about the Child Tax Credit?
If you have a child, you may see a bigger tax refund. The child tax credit doubled from $1,000 to $2,000, and the refundable amount increased from $1,100 to $1,400. If you care for a dependent who is not a child, a new, nonrefundable credit of $500 has been added.
8. Are there any changes to 529 plans?
Yes they may now be used for K-12 tuition! Tax-advantageous 529 education savings plans previously applied to qualifying college expenses only. Qualifying expenses up to $10,000 per child per year for elementary and secondary public, private, or religious school are now eligible.
9. Can I still deduct my mileage and business expenses as an employee?
Miscellaneous deductions which exceed 2% of your AGI will be eliminated for the tax years 2018 through 2025. This includes deductions for unreimbursed employee expenses and tax preparation expenses. To be clear, it includes expenses that you incur in your job that are not reimbursed, like tools and supplies; required uniforms not suitable for ordinary wear; dues and subscriptions; and job search expenses. These expenses also include unreimbursed travel and mileage, as well as the home office deduction.
Please note that the elimination of unreimbursed employee expenses only affects taxpayers who claim an employee-related deduction on Schedule A. If, as a business owner, you typically file a Schedule C, your business-related deductions are not affected by the elimination of Schedule A deductions.
10. Does the penalty still apply for not having health insurance for 2018?
The Affordable Care Act (ACA) individual mandate was effectively repealed but for tax years beginning after December 31, 2018, so the penalty still applies for one more year. Beginning Jan. 1, 2019, the ACA individual mandate has been reduced to $0. This was essentially the penalty paid by individuals for not acquiring minimum essential health insurance coverage. The ACA itself has not been repealed.
This is just a small glimpse at the items that have been modified, eliminated, or newly introduced as a result of the The Tax Cuts and Jobs Act (TCJA). We are here to help with all of your questions and concerns and to make sure you can take advantage of the provisions that affect you.