When Congress passed changes to the U.S. tax code in late 2017, taxpayers were left with a lot of questions.
While you will see some changes when you file your tax return for last year by this April, most of the controversial changes that Congress passed won’t affect taxpayers until they file their returns in 2019.
That said, we’re already fielding a lot of inquiries from clients tied to the Tax Cuts and Jobs Act.
The biggest question?
“How is it going to affect them?” says Amy Peek, owner of Pittsburgh-based accounting firm Peekz ConsultiN.
The tax overhaul includes a lot of changes, but here’s a look at some of the big ones:
BYE BYE PERSONAL EXEMPTIONS
Under the old tax code, there were personal exemptions. They essentially were the amount of money you could deduct — roughly $4,000 per person — from your adjusted gross income for every taxpayer or dependent that you claimed on your return.
But under new tax laws, the personal exemption is no more.
“So, for a family that has two or more kids, it’s really going to affect them,” Peek said.
In an effort to simplify the tax code, Congress did make changes to standard deductions that may partially offset the lack of personal exemptions for some families, however.
Congress nearly doubled standard deductions. For example, in 2017, the standard deduction for a single person was $6,100.
In the 2018 tax year, that goes up to $12,000 for a single person. For a couple, the standard deduction will increase from $12,400 to $24,000.
“So now, basically you can itemize or deduct the standard deduction from your (adjusted gross income),” Peek said. “That’s the only deduction. Whereas before, families could’ve deducted more, that won’t be available.”
As a result of the personal exemptions change, you’ll notice pretty quickly in 2018 that payroll withholdings are changing, as well.
In the past, when employees filled out W-4 forms when starting a new job or experiencing a life change, they indicated whether they were married or single and if they had any dependents. But the ability to claim dependents on these forms is going away.
Dependents will have no impact because taxpayers no longer have personal exemptions.
The bottom line?
“So people are being really surprised at how much is going to be taken out of the paycheck because dependents won’t matter,” she said.
CHILD TAX CREDIT
Families will see other changes in 2018.
Congress increased the child tax credit from $1,000 to $2,000 per child up until the age of 18. Under the old tax code, the credit stopped when children turned 17.
This money may also help partially offset the elimination of personal exemptions for some families.
In the past, the IRS phased out the tax credit for families whose income exceeded $125,000.
But Congress raised that cap to $250,000, which means more families will be able to take advantage of the credit.
WHAT CAN I DO?
If you’re still not sure how the new changes will hash out for your family, take a look at this calculator from the Tax Policy Center, a nonpartisan think tank.
If you are worried that some of the tax changes could negatively affect your tax situation, Peek recommends doing as much as possible to lower your taxable income.
That includes increasing contributions to 401(k) and other retirement funds. Also, funneling more money to health or dependent care plans, like flexible savings and health savings accounts, could help lower taxpayer burden, as well.
With this year’s changes to personal exemptions, Congress also adjusted tax brackets and rates.
Peek suggests taking any extra money you receive in your paycheck as a result of these changes and set it aside. With many of the tax code changes going into effect next year, Peek suggests keeping the money to help offset any surprises on your tax return.
PHOTO CREDIT: Ken Teegardin–Flickr–CC
Peekz ConsultiN LLC is a Pittsburgh-based accounting firm, located in the West Side, that caters to individuals, small businesses and nonprofit organizations. We aim to empower clients to help them take control of their finances and achieve their dreams.