With the Tax Reform bill of 2017 comes several important changes that could alter your finances for the new tax year. These changes may lead to you owing less and having more money in your pocket when it comes time to file for 2018 taxes. Because tax reforms are often mind-numbing and confusing, even with a Trenta-size cup of coffee and a good night’s sleep, take a look at a few of the most impactful 2018 tax changes and how they could affect your bottom line.
In past years, you filed a personal exemption if you qualified to reduce your tax liability. This amount was a lot like the deduction for dependents, which alters the amount you owed each year. Between the two exemptions, you likely deduct a substantial amount from your taxable income.
Personal exemptions will not be accepted for 2018 taxes. The dependent exemption has doubled to help make up for this change. The change reduces the impact it will have on your tax liability. Although, you may still be able to qualify for a similar exemption if you have dependents, even though the personal exemption is no longer in play.
The government has set a standard deduction rate for each class of taxpayer. This means that everyone who pays taxes has at least a portion of untaxable income. Many things are tax-deductible. Several common deductible items are listed below:
- Business miles driven
- Lifetime learning
- Health insurance premiums
- Miscellaneous business expenses
- Charitable donations,
One noteworthy part of the new tax reform is that the standard deduction has increased for each class of taxpayer. Depending on how you choose to file your 2018 taxes, you may be able to get a much larger deduction and may lead to extra money in your pocket after tax season. Individual classes qualify for the following deductions:
- Married couples filing jointly—$24,000 in standard deductions, nearly doubling the $13,000 of previous years
- Married couples filing separately—$12,000 in deductions in 2018, up from $6,500 previously
- Single taxpayers—$12,000 deduction instead of the previous $6,500
- Single heads of household—$18,000 standard deduction instead of the previous $9,550.
The purpose of increasing the amount of standard deduction is to help compensate for the loss of the personal exemption option. It also lowers the tax liability for almost everyone. This change means that you get more of the money you earn instead of paying more in taxes each year (is that the sound of your wallet growing?).
Tax Bracket Changes
Depending on your yearly income, you will fall into one of seven tax categories. In 2018, the brackets were set at 10%, 15%, 25%, 28%, 33%, 35% and 39.5%.
The Tax Reform bill changes these percentages to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your tax liability is larger if you are in a higher bracket, while those in small brackets will owe less each year.
While the tax bracket numbers are the same no matter how you file, the income amounts vary. If you are married, you may choose to file jointly or separately.
You can also file as single or as the head of a household. These small changes to tax brackets could result in significant changes in your financial situation. It all depends on how your yearly income places you in a specific category.
Increased Contribution Limits
Putting away money for the future is an integral part of any retirement plan. Maybe you dream of traveling the world after retirement, or you may only wish to have enough set aside, so you have a decent amount to live comfortably.
Whatever your goal is, changes to the tax bill allow you to put away more money to help make your dreams a reality. The Tax Reform bill encourages investing in the future by raising contribution limits.
The higher contribution limits benefit employees who wish to contribute to various retirement funds such as a 401(k) or a 457 plan.
Instead of the previous $18,000 limit, you may now put away $18,500 per year for the future. While the increase may appear relatively small, the extra money will add up quickly.
Big Changes, Big Savings
If you own and operate a company or are filing self-employed taxes, the increased deduction levels could change how your company files taxes. It could even positively affect your financial situation in the coming year, especially if you have employees or intend to hire employees.
If you file as an S Corporation, sole proprietor or partnership, you’ll enjoy a 21 percent tax rate so that you can order that new espresso machine for your office.
While the 2018 tax changes will not positively impact everyone, many people will benefit from having a lower tax liability. Many of these changes appear to be small but could have a significant impact on the wallet when it comes to file tax returns. Filing taxes in 2018 may be less of a headache, especially for those who understand the implications of these changes.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.