New tax code as seen on Forbes.com
On December 22, 2017, the Tax Cuts and Jobs Act received its stamp of approval from Congress, and tax reform was passed for the first time since 1986. This new reform (new tax code) has a lot of us wondering what will be different in the 2019 tax season and how it will help or hurt the economy. There are many different factors that will dictate whether or not you will benefit from the new bill, and this has many people nervous. While getting your taxes done may not always be the most pleasant experience you can think of, it is one of the most important. Knowing the updates involved in the new tax reform and the possible ways that it could affect your situation can help you prepare for the upcoming tax season and potentially save you from what could be a costly mistake.
In an attempt to simplify the tax code, the U.S. Individual Income Tax Return, better known as form 1040, has a whole new look. The new form, 1040 Simplified, seems to be just simplified on the surface. This one form has taken the place of the 1040A, 1040 and 1040EZ. The new form has been drastically cut down in size: The draft released by the IRS in June has about half the lines of the original 1040. Half the size should indicate half the work, but unfortunately, that doesn’t seem to be the case. According to the IRS, there have been at least six new schedules that will accompany the new 1040.
These six schedules are in addition to the current schedules, which means that, in fact, there are more forms to fill out just to get a simplified 1040. With the addition of these new schedules, there do seem to be some schedules that have been removed, like schedule B Interest and Ordinary Dividends and Schedule R Credit for the Elderly or the Disabled. But the IRS has yet to release the full details.
New Rules And Brackets
The new reform has also made some changes to the tax brackets for the 2018 tax season. These new brackets will go into effect in the 2018 tax season and could help or hurt you primarily based on location and income bracket. Overall, the tax rates have been cut for everyone from what they were in 2017, but taxable income will be increasing for many. In 2017 they were 10%, 15%, 25%, 28%, 33%, 35% and 39.60%. For 2018, they are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
So, for many Americans, a tax cut is possible — depending, of course, on your unique situation. However, with those tax cuts comes a limitation for deductions as well. A reduced deduction for mortgage interest and a capped deduction for state and local taxes could have a big impact on your taxable income, especially when accompanied by the disallowance of deductions such as unreimbursed employee expenses, tax preparation fees, personal exemptions, dependency exemptions, and theft and personal casualty losses. These new rules could increase your taxable income and make the tax cuts completely irrelevant.
Unfortunately, the personal exemption cannot be claimed in the 2018 tax year. This is big news for many of us and, depending on your personal tax situation, could reduce or increase your tax liability. For instance, if you were a single person with no dependents in 2017, you would have received a $6,350 standard deduction plus a personal exemption of $4,050 (if no one else could claim you) which totals $10,400, but in 2018 you will receive $12,000. Your tax liability has possibly been reduced in this situation with the new reform. However, if you were a married couple with three children in 2017, your standard deduction would have been $12,700 plus an additional $20,250, which totals $32,950. But in 2018 you will receive $24,000, so you may see an increase in your tax liability in the particular situation. With all the uncertainty surrounding the tax bill, there do seem to be some clear winners: married families without children, people in states with low taxes and corporate America. With a tax cut from 35% down to 21%, big businesses were clearly dealt a winning hand.
With so many new changes going into effect starting in the 2018 tax season, there are a lot of factors that will go into whether you will receive a refund or owe. The tax code is already almost 75,000 pages long and extremely complicated. Even with the new simplified 1040 and added schedules, thousands of pages are expected to be added to the tax code. Consulting your tax planner, enrolled agent or CPA is always the best way to make sure you are getting the most out of the new tax reform and that you don’t make any costly mistakes.
TMH is a full-service CPA and accounting firm that specializes in tax and consulting for individuals and companies of all sizes.