With tax season around the corner, this will be the first time folks will be filing under the new rules of the Tax Cuts and Jobs Act. Not surprisingly, they want to know, “How will this impact me and my family?” Below we’ve summarized some of the key items that have changed under the new law, what’s stayed the same, and what all that might mean for you.
Lower Rates and New Income Ranges
There are still seven tax brackets, just like before. The good news is that many of the tax rates have been lowered. So, most folks will find themselves in a slightly lower tax rate. And as the saying goes, “a penny saved is a penny earned.” Here are the old and new rates:
- The OLD brackets were:
- 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
- The NEW brackets are:
- 10%, 12%, 22%, 24%, 32%, 35% and 37%
Since the new Act changed the income thresholds at which the rates apply, your filing status (Joint, Single, etc.) will determine which income threshold applies to you.
No Changes to Social Security
The new rules won’t have a direct impact on the taxes that apply to your Social Security benefits. Just like before, those benefits will continue to be subject to federal income taxes, based on your combined income. Indirectly, however, the lowered income tax rates could mean that the taxes you pay on your Social Security benefits could be lower.
Limits on State and Property Tax Deductions
Less popular with taxpayers is the new $10,000 deduction limit on state and local income, sales, and property taxes. Before, you could deduct property taxes on any number of homes, and write off state and local income and/or sales taxes. This hits Californians hard, given the state’s high tax rates. We also see this being more of a burden for retirees with second homes, as they will no longer have the ability to write off all their property taxes.
Doubling Down on the Standard Deduction
The $10,000 limit on deductions is bad news, but there’s also good news in the deduction department. The new law roughly doubled the size of the standard deduction. Now it’s $12,000 for individuals and $24,000 for married couples who file joint returns in 2018. That’s up from $6,500 and $13,000. Also, people over the age of 65 have an even higher standard deduction – it has increased it by $1,600 for individual filers and $2,600 for couples. As a result, we expect many taxpayers to switch from itemizing to claiming the standard deduction. With that being said, this may not be good news for accountants and other tax professionals.
Tax Filing Deadlines
The tax filing deadline is April 15, 2019. If you need an extension, you will have until October 15, 2019 to file. As a best practice, we suggest waiting until late February or early March before filing your tax return. By that time, you should have your tax forms and even those re-sent 1099s.
The Bottom Line
At first blush, this combination of lower tax brackets and a higher standard deduction might seem to mean lower income taxes. However that may not be the case. The new tax law means that many deductions will be reduced or eliminated. On the other hand, the higher standard deduction will mean there may be no need to itemize. Our take on all of this? The new rules will likely be beneficial for most of our clients, resulting in less taxes owed. But as always, speak with your tax professional to determine how these new rules will ultimately affect you.
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