Much has changed in 2018 thanks to the Tax Cuts and Jobs Act – here are the most critical things for you to know before filing.
The most obvious change will be to the tax form itself. When you file your 2018 return, it’s going to be on a newly designed Form 1040. Not quite the size of a postcard, as was promised, but it’s pretty close. The Form 1040A and 1040-EZ are gone. The new 1040 used by all filers is a short two-pager, and is mostly for recapping income, deductions and credits. These items are reported on new schedules 1 through 6.
Of course, if you file electronically, as about 90 percent of us do, you won’t even notice this change. Just plug in the right information as you always have – you don’t have to worry where it goes on the form or schedules.
The new lower tax rates
While there are still seven tax brackets, a number of them have been reduced. For example, the top tax rate is now 37%, which is down from the old 39.6%. Overall, this means a lower tax bill for many people.
It doesn’t mean lower taxes for everyone, though. For example: The old ceiling for the 28% tax rate was $191,650 for a single filer. That 28% bracket is now gone and a single filer at that income level is now in the 32% bracket.
Another big change is the higher standard deduction amounts, which are nearly double what they were in 2017. They are $24,000 for joint filers and surviving spouses, $18,000 for heads of households, and $12,000 if you’re single, or married filing separately.
You still have the choice between the standard deduction and itemizing your personal deductions, like mortgage interest and medical expenses. However -- with the increased standard deduction, it may no longer make sense for you.
If you do itemize, the amount you can write off for state and local taxes - including state income tax, sales tax and local property taxes, is limited in 2018 to $10,000 – or $5,000 if you’re married and filing separately. Until now, there was no limit. That one is going hit some folks pretty hard – especially property owners in Oregon.
For folks who have been deducting non-reimbursed business expenses – such as mileage, union dues, uniform costs, and the like – say goodbye to that deduction too.
Also, no more personal exemptions for each dependent in your family. You used to get a $4,050 tax exemption for yourself, your spouse, and other dependents – but not anymore. Exemptions are eliminated for 2018, and through 2025.
If that sounds like a killer, consider this. The theory is, the loss of those exemptions is more than made up for by the higher standard deduction amount, and a child tax credit that is more than double what it was last year. But the only way to know for sure – is to file your return, and see for yourself.
Looking ahead to 2019
Every year, the IRS announces cost-of-living adjustments that affect contribution limits for retirement plans.
In 2019, employees who participate in 401(k), 403(b), and most 457 plans can defer up to $19,000 in compensation in 2019. That’s up by $500 over the 2018 limits. Employees age 50 and older can defer up to an additional $6,000 in 2019. We call those “catch up contributions”.
Employees participating in a SIMPLE retirement plan can defer up to $13,000 in 2019, which is up from $12,500 last year. Employees age 50 and older can put away up to an additional $3,000 in catch up contributions. For traditional and Roth IRA’s, the combined annual contribution limit increased by $500 to an even $6,000 in 2019. That amount is bumped up to $7,000 if you’re 50 or older.
If you have both types of accounts, that doesn’t mean you can sock away $6,000 in each – that’s the total combined amount you can contribute to IRA’s.
Clearing the air about your 2018 refund
A lot of people are getting upset that their refund doesn’t seem to be as large as it used to be, before the new tax code took effect.
Keep this in mind – the way the tax code was structured, in most cases, the amount deducted from your paycheck every month was reduced – resulting in more money going home with you.
The other result of this shift, is that the amount you overpaid to the government may have been reduced, as well. So the number you want to look at, and compare to last year, is the total amount you paid in taxes throughout the course of the year – not just the amount you’re getting back.
Because the only reason you get a tax refund, is because you allowed the government to use your money, interest free, for the last several months, through your withholding.