Tax season is here, and the deadline is fast approaching. This year, more and more people are waiting to file their taxes, and even some professional tax preparers are taking a wait-and-see approach to make sure they’ve nailed down all the details of the new law. That’s because a new tax law that took effect on January 1, 2018, created the most substantial change in the tax system in over three decades. And while some of those changes may be helpful, figuring out exactly how they affect the 2019 tax filing season is a little complicated. While we can’t offer legal advice (you can turn to our excellent TrustDALE certified accountants for that), we can give you a glimpse into some of the most extensive and most relevant changes in the tax laws affecting your 2019 filing.
Changed Tax Brackets
One of the most significant changes is a recalibration of the tax brackets. Tax brackets identify the percentage of your income (or other monies) you owe in taxes, based on your annual income.
However, there is a common misconception that your income places you into a tax bracket which affects all of your income. In fact, the amount of money you owe is based on how much money you made in that tax bracket. Let’s take the following simplified example, in which the tax bracket is 10% for $0-$10,000 and 20% for $10,000-$20,000. If you make $15,000, the first $10,000 is taxed at 10%, and the remaining $5,000 is taxed at 20%. So you would owe a total of $2,000 ($10,000 x 10% + $5K x 20%) in taxes.
The old tax brackets were: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%
The new tax brackets are: 10%, 12%, 22%, 24%, 32%, 35% and 37%
You will notice that in each bracket the total taxes owed is lower. In addition, the level of income in each tax bracket was raised slightly, so more of your income will be taxed in a lower bracket. The highest tax bracket for married joint filers used to start at $470,700. Now it starts at $600,000. For single filers, the highest tax bracket has been raised from $418,400 to $500,000.
Alternative Minimum Tax
The alternative minimum tax (AMT) exists as a way to ensure that no one is able to claim so many deductions that they don’t pay any taxes. It was put in place in the 1960s after Congress noticed that 155 very high earners had claimed so many deductions that they legally paid absolutely no federal tax.
Today, who pays the AMT is a bit complicated, but it can kick in if you claim a lot of deductions and can also eliminate certain deductions. However, the new tax law has raised the amount of money exempted from the AMT, so fewer people will end up paying it.
Increased Standard Deduction
Deductions are money that you can simply not count as part of your income. They can lower your tax brackets and, of course, reduce the amount on which you are taxed. Depending on your situation, there are many, many possible deductions for individuals, families, and businesses. The most common deduction that people take is the standard deduction. It is a basic deduction that everyone is entitled to if they choose not to itemize their deductions. This year, the standard deduction has nearly doubled, allowing more people to take the deduction and creating a bigger deduction for many people.
On your 2018 returns, the standard deduction was $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly.
On your 2019 returns, the standard deductions have jumped to $12,000 and $24,000 for those filing individually and jointly, respectively.
Increased Child Tax Credit
The child tax credit is a deduction that families can take for minor dependents. The deduction has doubled from last year, from $1,000 to $2,000 per child. The amount that could become a refund has increased from $1,100 to $1,400. Also, if you have dependents other than children, the new tax law has created a deduction of $500 per dependent, which is non-refundable.
In the past, if a married couple earned more than $110,000, they couldn’t claim the child tax credits. In the new law, the limit has increased to $400,000, allowing pretty much any family in the lower 99% of earners to claim the credit. (In 2018, the top 1% of families in the U.S. made at least $421,926.)
Deductions That Have Gone Away
Some common deductions have gone away with this new tax law. The personal and dependent tax exemptions, which were $4,050 in the last tax year, have been removed, even as the child tax credit has doubled.
If you live in an area with high taxes, high property values, or significant property taxes, you may be in for a bit of a shock. In the past, your state and local property, income, and sales tax were all entirely deductible. Under the new law, your deduction is capped at $10,000. That could make a big difference for people who pay a lot of local taxes. Also, if you deduct interest paid on your mortgage, you will see the amount of debt that qualifies for the deduction drop from $1 million to $750,000. That’s especially relevant for people who live in very expensive parts of the country.
In a significant shift away from the original intent of the Affordable Care Act, the tax penalty for not having insurance was completely dropped. Also, the amount of out-of-pocket medical expenses that you can deduct was raised just for the 2017 and 2018 tax years. Instead of deducting medical costs above 10% of your adjusted gross income, in 2017 and 2018 you can deduct expenses above 7.5% of your adjusted gross income. Next year, it is expected that the limit will return to 10%.
The changes to business tax law are complicated. One simple takeaway is that the maximum corporate tax has gone from 35% to 21%, the lowest rate since 1939. However, in the past, there were almost no companies who actually paid 35% after deductions and other tax schemes. For example, in the year before the new tax law went into effect, corporations paid an average of 18.5%. Many large corporations are S Corporations, which means that pay no corporate tax at all. The money instead goes to the shareholders, who pay taxes on it as part of their personal taxes.
The new tax laws can be hard to get a handle on. If you own a business or just aren’t sure about your taxes, we recommend that you contact a reliable TrustDALE certified accountant or TrustDALE certified tax lawyer.