You’ve probably heard about the new tax law by now, and depending on your political preference, you either love it or hate it. But regardless of which way you swing politically, it’s important to understand how the new tax plan – passed in December 2017 – impacts your finances.
In fact, the more you know, the easier it will be to maximize your tax refund. To help you get started, here are 6 things you should know about the new plan.
1. It won’t go into effect until the 2018 tax year
While 2017 tax returns are due in April, don’t go crazy trying to figure out how you’ll be affected by the new tax changes. You have plenty of time to get up to speed before the deadline to file taxes for 2018 – in April 2019.
Of course, the sooner you learn how the changes affect you, the sooner you can start planning to take advantage of any available tax breaks.
2. Tax rates are lower across the board
The new tax plan lowers individual income tax rates for almost everyone, which may provide tax refunds, depending on other factors in your tax return. For example, according to published information provided by the Tax Foundation, here’s how things are changing for married couples filing jointly:
|Current Tax Law||Tax Cuts and Jobs Act|
|Tax Rate||Taxable Income||Tax Rate||Taxable Income|
|10%||$0 to $19,050||10%||$0 to $19,050|
|15%||$19,050 to $77,400||12%||$19,050 to $77,400|
|25%||$77,400 to $156,150||22%||$77,400 to $165,000|
|28%||$156,150 to $237,950||24%||$165,000 to $315,000|
|33%||$237,950 to $424,950||32%||$315,000 to $400,000|
|35%||$424,950 to $480,050||35%||$400,000 to $600,000|
Note, however, that these new tax cuts aren’t permanent. To comply with Senate budget rules, they’re expected to expire after 2025. So, if your income stays the same, you may see higher taxes again in 2026.
3. You may not need to calculate your itemized deductions
One of the bigger changes Congress made to the tax code was increasing the standard deduction. To clarify, every taxpayer is allowed to make certain deductions from their income before the IRS applies the relevant tax rate.
Everyone is eligible for the standard deduction, which is currently $6,350 if you’re single or $12,700 if you’re married and filing your taxes jointly. With the new tax plan, however, that standard deduction goes up to $12,000 for single taxpayers and $24,000 for married taxpayers filing jointly.
This means that you may opt to forego itemizing your deductions as it may not be necessary. For example, in 2017 if you had certain eligible expenses that exceeded your standard deduction amount, you could itemize them – resulting in a bigger deduction and lower taxable income. Going forward, however, you may not need to calculate your deductions for expenses – like charitable donations and mortgage interest – because the new standard deduction may be higher than your combined expenses. For many people, a higher standard deduction may automatically result in a lower taxable income.
4. Bigger families could lose the benefit of a higher deduction
While Congress almost doubled the standard deduction, this increase has been offset by the loss of personal exemptions.
For instance, you can typically take a personal exemption for you, your spouse (if you’re married) and each of your dependents. For the 2017 tax year, the personal exemption is $4,050 per person. So, if you’re married with a family of five, that’s a $20,250 reduction of your taxable income – in addition to the standard deduction of $12,700.
Yet, with the loss of personal exemptions in 2018, a family of five may actually end up with a higher taxable income than before the bill was passed.
5. The new-and-improved child tax credit could help soften the blow
If you have one or more qualifying children — learn more about who qualifies here — you may be able to claim a $1,000 credit for each child in 2017, which directly decreases how much you owe in taxes. This is in contrast to a tax deduction, which decreases your taxable income.
With the new tax law, that credit gets doubled to $2,000. What’s more, up to $1,400 of the credit is refundable.
6. Business owners may get a huge tax break
If you own a business that has pass-through income, you’ll be able to deduct 20% of your business income when filing your taxes. Pass-through income means that income from the business passes through to the owners and is taxed on an individual level.
According to the Brookings Institution, 95% of U.S-based businesses are pass-through entities, so your business may already qualify for this deduction.
You’ll be eligible to maximize this deduction if your household income is less than $157,500 (or $315,000 if you’re married and filing jointly) and your business is one of the following entities:
- Sole proprietorship
Work with a tax professional to get up to speed
While these are some of the biggest changes in the new tax plan, they’re far from the only ones. To get up to speed on how these and other changes to the tax code will affect you, it’s a wise idea to work with a tax professional who understands the ins and outs of the tax code and can help you take advantage of the changes.
Although hiring an accountant or tax advisor may cost you, keep in mind that you can also earn it back – plus some – if you end up with a higher tax refund going forward. And while you’re at it, make sure you set up direct deposit to receive your tax refund. This way, you’ll get your refund within 21 days rather than eight weeks.