Here’s How the New Tax Law Affects You

, , , , ,

Tax season has come and gone, but there are some things you should know about the new tax bill that will affect your 2018 taxes next year. This is a particularly important reform since it is the largest reform in over thirty years, as well as one of the most complicated.

First, Some Basics Explained

Of course, we will all be expected to file as usual next year in the same way (single, married filing separately, married filing jointly, head of household, qualifying widower), but as with any tax reform, the way things are calculated will change somewhat. There are some surprisingly good things coming over the horizon for many, and there are a few others that might take a bit to get used to.

Your tax rate is not determined by looking at how much you make each year and then just looking at the tax bracket that it fits into.  Instead, the amount of taxes to be paid is calculated by spreading payments out over each tax bracket as it applies until it finally reaches the highest bracket that the total income fits into.  

For example, if you make $80,000/year, you are not taxed the same rate for the entire amount.  First, the amount you make that fills up the first bracket is taxed according to that rate, then the next bracket that you fill up is taxed accordingly, and so on. So if the poorest are unable to pay taxes within their bracket, the money you make that fits into that low category is taxed exactly like theirs. If they pay no tax on that money, which is all that they have, then you don’t pay tax on that money, either… until you overflow into the next tax bracket. After that, you only pay the tax rate for the amount of money in the new bracket.  

Be aware that there are quite a few resources to assure that you are completing your taxes correctly so that you have no scary surprises. It is always wise to get legal help.  There are incredible attorneys to help you file your taxes, dispute the IRS, evaluate your estate plan, or sort through bankruptcy issues. Just click here to find a qualified lawyer near you!

2018 Changes

Our U.S. tax system remains progressive with tax rates starting at 10% for those struggling to make $19,050/year up to 37% for those that make at least $600,001/year. Folks in the highest tax bracket are spared from paying the highest rate for all of their income.

Personal exemption is eliminated completely.  

This was a feature that came out when the concept of income tax was implemented.  For ages, it has been deducted in addition to the tax deduction.

In 2017, the exemption was $4,050 that could be deducted for each dependent plus the taxpayer filing. That means that if a family of four is filing, then each person was counted and they are allowed to deduct $16,200, in addition to the deductions allowed for their income threshold. For 2017 tax, this was made available to those that are not making at least $313,800/year. They were planned to increase to $4,150 next year, but were eliminated instead.  

Tax deductions will increase for all.

General tax deductions for all who file has been around since the beginning of the income tax. It is the flat amount that the government lets you deduct from your income and reduce your overall tax bill. For our 2017 taxes (filed this year), it was $6,350 for single taxpayers, but our 2018 taxes will deduct up to $12,000 from their tax bill.

Alternative Minimum Tax (AMT) relief is adjusted to match inflation.

Now those married filing jointly will not be expected to pay this if they make less than $109,400 married filing jointly, rather than $84,500 before.

Single taxpayers are spared if they don’t make at least $70,300, rather than $54,300.

Child Tax Credit will be increased and extended to those with significantly higher pay.

This credit was applied to those that made $110,000/year or less, and now under the new rule the credit is extended up to those that make $400,000/year. Now, families will get to double their child tax credit and get $2,000 per child. This deduction is in addition to all other tax deductions and those that qualify (with smaller incomes) can even get this money in their tax refund if there is any remaining money after paying Uncle Sam.

Tax deductions for property, income, and sales will be limited.

Now, instead of having no limit, they will not be able to be more than $10,000.

There will no longer be a penalty for not having health insurance.

After December 2018, those that do not get some kind of healthcare will no longer be required to pay a fine. Also, temporary relief is offered for 2017 and 2018 for out-of-pocket medical expenses. If they are 7.5% of your adjusted gross income,  you can deduct them from your tax bill.

For businesses large and small, there have been quite a few changes.  

Small businesses can expense almost twice as much as before and they don’t have to pay the AMT. However, smaller companies are likely to see a tax hike unlike larger businesses that will see a strong reduction.

The corporate tax rate has dropped to 21%. However, the cost to restructure for certain things can feel overwhelming for smaller companies with less than 100 employees.

“Entertainment” is no longer going to be a tax write-off. There are quite a few changes within this arena, so if this affects you, be sure to take time to thoroughly understand the new tax reform.

With big modifications such as these happening, it is wise for entrepreneurs to get the help of a tax attorney, especially if an audit is likely

0 replies
Want to join the discussion?
Feel free to contribute!

Leave a Reply