Heard the news didn’t you? Your tax refund for the 2018 tax year is going to be significantly smaller. Why? It’s simpy because the changes in the 2017 Tax Cuts and Jobs Act are now taking effect.

You probably feel uncertain about what all this means for the 2018 filing period. Here’s a comprehensive guide to help you navigate the murkty waters of taxation.

These 2018 tax changes include:

  • standard deductions
  • the new child tax credit as well as additional changes for taxpayers with children
  • the new 2018 income tax brackets
  • 2019 marginal tax rates
  • impact on SALT deductions
  • mortgage deductions
  • charitable contributions
  • healthcare
  • medical expenses and more

Let’s dive in and highlight what we are all concerned about the most.

Changes in Marginal Tax Rates and Income Brackets

A lot of people have had conversations about the updates being made to the income tax brackets and the new marginal tax rates; both of which has been impacted by the 2018 tax reform bill.

The marginal tax rates are the basic percentage of your income that is paid in taxes. What this means is that taxpayer’s income is not taxable based one single rate, but at multiple rates, based on the taxpayer’s accumulated earnings throuhout the year.

Your tax rates, on the other hand, which is simply the rate that corresponds to a specific tax bracket, are merely rates used to tax taxpayer’s income based on an income range.

Below is the 2017 marginal tax table along with the changes made to the 2018 marginal tax rate table that follows.

2017 Marginal Tax Rates

2018 Marginal Tax Rates

The Standard Tax Deductions

Taxpayers who normally don’t itemize can look forward to a much higher standard deduction this tax season. The standard deductions is almost doubled as a result of the new tax laws

However, those who normally itemize their deductions – meaning they calculate their deductions one at a time, may find the standard deductions a double-edged sword. Families with four dependents or more will also have less standard deductions these coming years.

The following is a quick overview of the amount of the 2017 standard deductions compared to the new 2018 standard deduction:

Check these tax decutions and credits for small businesses and maximize your tax refund now.

Significant changes of the 2018 Tax Deductions

However, there’s more to it than what meets the eye.

Sample Tax Scenario

The 2018 tax reform bill eliminated the personal exemptions.

The personal exemptions were the amount that taxpayers could previously deduct from their taxable income; for both themselves and their dependents claimed on their tax returns. But when taking a closer look, here’s how the calculations look.

Scenario before the 2018 tax laws

During the 2017 tax year, the personal exemptions for each dependent and for each taxpayer was $4,050.

Moreover, taxpayers who filed married filing jointly, and did not claim any dependents, who also earned $100,000 each year was given a standard deduction of $12,700. Their personal exemptions were $8,100.

Scenario during the 2018 tax year after the tax bill was passed

Considering the same couple used in the example above during the 2017 tax year, in 2018, the standard deduction for a married couple would now be 24,000, but there would be no personal exemptions, which would result in a taxable income of $76,000.

However, as previously mentioned families filing jointly with 4 dependents or more will have lower deductions this 2019. But the new and higher child tax credit can offset the lower deductible amount.

Changes Made to the Child Tax Credit

With the new 2018 tax changes come higher child tax credits.

During the 2017 tax year, if parents earned less than $110,000 combined and individually earned 75,000, they would receive a $1,000 child tax credit for any qualifying child under age 17.

However, the new tax reform bill increases the child tax credit, which is now $2,000 for each qualified child. In addition to that, the tax reform bill has raised the income limit to qualify for the credit to $400,000 jointly and $200,000 for each individual.

Read here for more in-depth information on the 2018 new child tax credits. If you are the head of household, more credits are also coming your way as long as you have an eligible dependent.

Additional Changes for Taxpayers With Children

Do you have a 529 college savings plan for your children?

Typically, the money placed in this type of savings plan grows tax-free, but it was only limited to qualifying college expenses. But now, the 2018 tax reform bill allows parents to use the 529 college savings plan for other educational purposes as well.

For example, you can now use funds saved in the 529 accounts for tutoring expenses for children in the kindergarten through the 12th grade. You can also use the account to pay for private school and other associated expenses; all tax-free.

Although this plan can be used for various educational expenses tax-free, do consult with your tax advisor to learn more. Or use a tax software that can do all the calculations for you.

What About Your SALT deductions?

SALT, short for state and local taxes, is a deduction that taxpayers could usually take advantage of when they itemize their deductions. The SALT deductions consist of property taxes, sales taxes, and income taxes.

However, significant changes in the new tax laws are going to greatly affect your SALT deductions.

During previous tax years, there was no limit placed on state and local tax deductions. However, the new tax reform bill capped deductions at $10,000.

So now, taxpayers will not be able to deduct SALT taxes that exceed $10,000. For taxpayers living in states with high taxes such as California and New York may end up paying significantly more taxes. At the very worst, they can also end up with unforeseen tax debt to the government.

Healthcare and Medical Expenses

Many taxpayers also commonly used medical expense deductions to reduce their tax liability. They could deduct medical expenses that were not reimbursed beyond 10% of their adjusted gross income (AGI). However, the new tax bill has reduced the limit to 7.5% of the adjusted gross income.

As far as health care cost is concerned, the current Affordable Care Act penalizes those without healthcare. But the one benefit of the new tax law is that the penalty associated with not getting health care insurance has been removed. However, the change won’t take effect until the next tax year. So the $695 penalty is still in place for the current tax year.

Mortgage Deductions

Since most mortgage-related deductions are itemized, how will the new tax bill impact on homeowners?

During previous tax years, the IRS allowed homeowners to deduct the interest paid on their primary residence – and in some cases on second homes as well. The second home deductions applied for homeowners whose principal on their original mortgage was $1 million or less.

But now that the new tax changes are in place, the maximum mortgage principal has been lowered to $750,000. Homeowners with current mortgages between $750,000 and $1 million will be relieved to know that their lowans will be grandfathered into the old deduction.

Also, homeowners can deduct any interest paid within the tax year on home equity debt that didn’t exceed $100,000.

Capital Gains and Your Primary Residences

Prior to the new tax reform bill, homeowners could exclude capital gain tax in the amount of up to $250,000 or (up to $500,000 if they are married and filing jointly) after selling their primary residence. They were required to have lived in the home for at least two of five years prior to the sale.

But now, with the new tax reform bill, they are required to live in their primary homes longer before selling their primary home.

Homeowners who sold their homes on or after December 31, 2017, must first have lived in the home as their primary residence for five of eight years prior to the sale of their home to claim this exclusion. In addition to that, homeowners can only claim this exclusion one time within a five year period.

This new tax law is set to expire December 31, 2025.

Estate Tax Exemptions

Taxpayers who inherit money or property will benefit from the 2018 tax changes.

During the previous years, estate tax, the tax that paid on inherited property or money, was taxed at a 40% tax rate. The 40% rate applies to inheritance valued over $5.49 million. The 2018 tax laws sets the new value to a combined total of $11.2 million.

Charitable Contributions

Charitable contributions have also been impacted by the 2018 tax reform bill. During the 2017 tax year, taxpayers could deduct charitable contributions up to half of their income when writing off qualified charitable contributions.

But now, the 2017 TCJA increased the limit for charitable contributions to 60% of their income.

Say Good-bye to These Deductions

During the discussion of some of the other deductions that could have been reformed, some were not considered at all and were ultimately eliminated as a result of the new tax reform bill. They include the following:

  • Moving expenses
  • Tax preparation expenses
  • Theft and casualty losses (except if due to a federally declared disaster)
  • Alimony payments
  • Transportation reimbursement
  • Unreimbursed employee expenses
  • For your subsidized parking

However, if you operate a small business there are other ways to take advantage of these expenses.

The 2019 Tax Year Changes

Now that you have a better understanding of the changes that affect the 2018 tax year, we will now cover a few tax changes that will have an impact on the 2019 tax year. The upcoming 2019 tax changes that will impact the tax returns filed in 2020 include the following:

  • The penalty for not having health insurance coverage under ACA will be eliminated
  • There will be a significant increase in the standard deductions, 12,200 for single tax filers and $24,400 for married tax filers filing jointly
  • To account for inflation, there will be an increase in income tax brackets for the 2019 tax year

Word of Advice

If you are unable to file your tax returns on time, file for an extension. If you are unable to pay your taxes, don’t panic. Read here to know what to do. For better accuracy and faster refund, e-file your taxes.