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The Effects of the New Legislation

Piggy bank with a jar of money next to it that says tax refundNow that tax season is here, the early indications of the effects the 2017 Tax Reform are starting to show.  While fewer people have filed their returns than this time period in past years, the data is showing that more and more Americans are seeing lower refunds  than in years past.  Many taxpayers did  not understanding the full implications of the tax reform and failed to make the proper changes.  Since we are still relatively early in the year, now is the time to review those possible changes for 2019.

The easiest change to make is to your withholding.  The IRS has updated the withholding tables and every working taxpayer should review their Form W-4.  The W-4 is essential in your taxation as it lets you select your withholding allowances and appropriate filing status.  It is best to fully understand how to complete your Form W-4, as it will ensure you are withholding the proper amount.  The amount that is taken out through your W-4 is a delicate balance of withholding enough that come tax time, you have paid enough, without over withholding and making funds tight during the year.    If you withhold a larger amount, you may have a larger refund, while withholding a smaller amount may mean paying at tax time.  You can adjust your W-4 throughout the year if things change regarding your income, filing status, qualifications for credits, or other  taxation items.

Tax reform has also changed the capital gains rate and dividends are another  income source that qualifies for the lower tax rate.  Before tax reform, the rules for lower rates on these types of investment income were easier to understand.  Previously,  taxpayers in the 10% and 15% brackets paid 0%, the 25% to 35% brackets paid 15%, and the 39.6% bracket paid 20%.  Utilizing smart investment strategies to receive qualified dividends and long-term capital gains during this period may greatly impact your tax burden.  Work with your investment broker to ensure that you meet the requirements of the “qualified dividend”, as nonqualified is taxed at the higher ordinary income rate. 

The standard deduction looks quite different after the tax reform laws.  With the loss of the personal exemption, many taxpayers looked to the standard deduction to assist them in reducing the taxable income reported on their return.  The standard deduction reduces the earned income that is subject to tax automatically without the need to apply for credits or prove qualifications.  Between 2017 and 2018, the standard deduction doubled for most taxpayers.  There will be a slight increase in the standard deduction between 2018 and 2019.

Tax credits are also a great way to reduce your taxation.  If you are a student, the Lifetime Learning and American Opportunity credits are still available to you.  The Lifetime Learning credit provides for a 20% credit of up to $10,000 in qualified expenses, provided the taxpayer is eligible.  This credit applies to graduate school, trade schools and other nontraditional education.  The American Opportunity credit applies to 100% of qualified tuition and fees up to $2,000 and another 25% of the next $2,000 for a total of $2,500 in credits for eligible taxpayers, and applies to  undergraduate education only.  If your children are too young for higher learning, you still may be able to get a credit for them with the child tax credit, which  can provide up to $2,000 in credits for children residing with the taxpayer that qualify.  There is also a credit for making retirement contributions.  The Saver’s credit pays up to $1,000 per person that qualifies for making contributions to an IRA, 401K plan, or other similar retirement accounts.

Many taxpayers ask if the itemized deductions are going to become a thing of the past.  While the standard deduction increase made it possible for many taxpayers to forego the itemized deduction calculations, it is important to note that they are still in affect and depending on your situation.  The mortgage interest deduction still allows for taxpayers to deduct interest on up to $750,000 of mortgage debt (with a grandfathered deduction of up to $1 million on certain qualified mortgages).  Also, home equity debt may  qualify for the deduction of interest associated with the loan, depending on use.  State and local taxes, as well as real estate taxes are still on the table for deductions, although  state and local taxes are capped at $10,000 in the new tax reform.  Charitable donations to qualified charities are also still available as a deduction with proper documentation  by the receiving charity.  In reviewing whether or not to  take the itemized deduction over the standard, it is best to strategize ahead of time to determine where you can make changes that would allow you the best outcome.

Retirement IRA contribution limits will increase in 2019 by $500 for all taxpayers.  401(k) contribution limits have also increased by $500 annually.   It is important to remember that the tax deductions that apply to the different types of retirement vehicles still apply.  Be sure to review your type of retirement, along with income phase-out rules before relying on retirement contribution deductions. Tax savings may also apply if the taxpayer is able to make contributions to a 529 plan, Coverdell ESA plan, or a health savings account.  Some states allow credits for making contributions to state 529 or educational plans. 

Reviewing which credits you may qualify for and planning ahead to get the most out of your contributions will be beneficial come tax time.

Do you have the support you need to manage your small business bookkeeping? Schedule a 30-minute appointment to speak with a local small business adviser.

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