Many of the changes written into the tax law signed by President Trump in December 2017 were implemented for the 2018 tax year. That means this year, 2019, is the first year most of those changes will be reflected in our tax returns. The average American will definitely see the influence of those changes between now and April 15.
So what has changed, exactly? The law means different things to both individual taxpayers and businesses, but it is quite likely that most people will save money as a result of its reforms. In either case, expect the following five changes when you file your taxes this year.
1. Different Tax Brackets
In an attempt to reduce income taxes, legislators stuck with seven tax brackets while adjusting the rates for each bracket. Rates are generally lower with the exception of the minimum rate of 10%. Also, note that some of the thresholds between tax brackets were also adjusted. What does this mean practically speaking? It means that fewer taxpayers will be paying the highest rates.
The Motley Fool cites the example of a married couple earning $480,050 and filing jointly who previously would have paid 39.6%. Their tax bracket has been lowered to 37% while the threshold has increased to $600,000.
2. Personal Exemption Eliminated
Prior to the changes, taxpayers could claim personal exemptions to reduce their taxable income. A married couple with dependent children could claim an exemption for each member of the family provided the couple filed jointly. Things got complicated in certain situations where parents and their children did not live together full-time.
In an attempt to simplify the tax law, congressional leaders eliminated personal exemptions beginning in the 2018 tax year. The loss of those exemptions is offset by lower tax rates, higher thresholds, and a doubling of the standard deduction.
3. Higher Standard Deductions
People who choose to not itemize deductions on their federal returns can choose the standard deduction instead. Congress has doubled that exemption in order to make up for the loss of personal exemptions. For example, the standard deduction in 2017 for a single person or married couple filing separately was $6,350. It increases the $12,000 for 2018 and $12,200 for 2019.
4. Higher Child Tax Credit
Restrictions on the tax child credit have been loosened to make more families eligible for them. The value of that credit has also been doubled. Parents can now claim up to $2,000 per qualifying child under the age of 17. Furthermore, taxpayers can still receive up to $1,400 per qualifying child even if they owe no tax.
5. The Final Year for Obamacare Penalties
Perhaps the most profound effect of the 2017 law is the elimination of the individual mandate for health insurance. Otherwise known as the Obamacare mandate, it went away on January 1. Note that the mandate was still in effect for the 2018 tax year, so you will still pay a penalty when you file this year’s taxes if you didn’t have qualifying insurance and you could have afforded it. If you do pay a penalty, this will be the final year. There will be no penalties in 2020.
Gurian CPA Firm, a Dallas CPA firm offering individual tax services, says there are other changes that will have less of an impact on most individual taxpayers. They recommend working with a CPA for this year, at the very least, in order to make sure your taxes are done correctly and in such a way as to minimize tax liabilities. There is no point in paying more than necessary.