Every January we look forward to those W2's in the mail. We hope that we receive a refund and not have to pay the IRS. We also don't want to get audited. The Tax Cuts and Jobs act has changed the tax game rules until 2025. If You file taxes here's what you need to know!
Tax brackets -- Still seven, but with different rates
One of the headline changes made by the Tax Cuts and Jobs Act was a general lowering of U.S. tax rates. While the number of tax brackets remained at seven, the rates were generally lowered, with the exception of the minimum tax rate staying at 10% for the poorest Americans.
In addition to lower tax rates, the income thresholds were increased, particularly at the higher tax brackets. In other words, the highest tax brackets now apply to fewer (higher-earning) Americans than it did previously. For example, before the passage of the Tax Cuts and Jobs Act, the top tax rate was 39.6% and applied to married couples filing jointly who earned more than $480,050. With tax reform, that top rate was lowered to 37% and only applies to married couples making more than $600,000 in taxable income, much more income than before.
Higher standard deduction
The Tax Cuts and Jobs Act nearly doubled the standard deduction from previous levels. Taxpayers can choose between using the standard deduction or itemized deductions. Itemizing deductions means adding up all of the individual tax deductions to which you're entitled and then subtracting them from your adjusted gross income (AGI). (Note: Adjusted gross income is your total income minus a few adjustments. Common adjustments to income include traditional IRA contributions and student loan interest, just to name a few.)
On the other hand, the standard deduction simply is a set amount that Americans can choose to deduct instead. Taxpayers can use whichever of the two methods is more beneficial to them.
The majority of U.S. households use the standard deduction, so this change will certainly affect millions of people.
The Child Tax Credit has doubled
Although families with several children may feel the sting from the repeal of the personal exemption, there's some good news. Not only has the Child Tax Credit been increased, but more of the credit now is refundable and the income limitations are far less restrictive.
Briefly, it's important to mention that a credit is very different from a deduction. While a deduction lowers the amount of income that the government considers when taxing you, a tax credit actually reduces the amount of tax you owe, dollar for dollar. If you owe $1,000 in tax, a $1,000 credit would pay it off for you while a deduction just would lower the income level that your tax rate would apply to. In other words, a $1,000 credit is far more valuable than a $1,000 deduction.
Tax reform was good for the Child Tax Credit, which was doubled to $2,000 per qualifying child under age 17. As much as $1,400 of this amount is refundable -- meaning that it can be claimed even if the taxpayer's federal income tax liability is already zero. So even if a parent has little income or otherwise owes no federal income taxes, they could still take advantage and get this money back.
No more Obamacare penalties, starting in 2019
The Tax Cuts and Jobs Act did eliminate the individual mandate -- aka the "Obamacare penalty." This is the penalty you pay for not having health insurance.
One important caveat: The penalty is only repealed in tax years 2019 and beyond. If you didn't maintain qualifying health coverage throughout 2018, you still may face the penalty when you file your tax return in 2019.
The estate tax applies to even fewer American families now
To be perfectly clear, the estate tax, which is essentially a tax on inherited wealth, only applied to the wealthiest U.S. households, even before the Tax Cuts and Jobs Act was passed. However, the new law makes it apply to even fewer filers.
Under the former tax law, the estate tax only applied to the portion of an estate that was in excess of $5.59 million (2018). The new law doubled the threshold to $11.18 million for 2018 and will increase again in 2019.
Which tax deductions are gone?
Moving expenses -- This was an above-the-line deduction, meaning that it could be taken whether or not a taxpayer itemized, and was designed to offset the costs of job-related moving expenses. Now, this deduction is gone, except for certain moves related to active-duty military service.
Casualty and theft losses -- If your home was burglarized, you formerly were able to deduct the value of the stolen items. Now, the deduction only can be used for losses attributed to a federally declared disaster.
The "miscellaneous deduction" category -- This is one true simplification to the tax code. There used to be a long list of deductions that Americans could take advantage of, to the extent that they exceeded 2% of AGI. This included things like unreimbursed employee expenses, tax preparation expenses, and more. Starting with the 2018 tax year, these deductions are gone,
These are just some of the basics of the new tax laws in the US in 2019 and beyond.