“In this world, nothing can be said to be certain, except death and taxes.” is a quote, popularly attributed to Benjamin Franklin (although Daniel Defoe is thought to have said something very similar almost 100 years earlier).
That said, the current 2019 tax season (filing to pay taxes on 2018 income) is one of the most uncertain due to the changes, ushered in by the questionably monikered Tax Cuts and Jobs Act. Depending on your political stripes, you may believe the TCJA is resulting in tax cuts for the 1% or for the middle and lower economic brackets; but certainly, given the name, it is reasonable to assume that the Act resulted in lower taxes for someone. The question is: Is that someone me? The answer, I regret to say is: Maybe.
The TCJA is a lot like a Rube Goldberg machine. They both have more moving parts than necessary and the direction of motion, initiated by one component of the machine may well be countered or reversed by a push form another component at any time. Here are some of the basics of the TCJA’s parts.
Tax rates and brackets have changed. Yes, these rates are basically lower, but income brackets have also changed. Some have widened so you stay in a lower bracket longer, but some have narrowed so you go up soon to a higher bracket. It all depends on filing status. You can look here to find your applicable rate.
Of course, there’s a lot that happens to determine how much of your income is taxable, long before you even apply those brackets and rates. And those things have changed too.
You cannot deduct moving expenses unless you are part of the military.
If your divorce was finalized after 12/31/2018, you cannot deduct alimony if you are the one paying it, starting with your 2019 income year. On the other hand, if you are the alimony recipient, you don’t have to pay taxes on it.
Standard deductions have nearly doubled for each filing status. This means that many more people will be better off taking the standardized deductions rather than itemizing BUT…
Personal exemptions ($4,050/person in 2017) have been eliminated. Practically speaking, this means your past combined deductions and exemptions may be higher or lower than your current deduction, according to the number of exemptions your family unit has lost.
If, despite the higher standard deduction, you still choose to itemize, the amount you can include for State and Local Taxes (SALT) is limited to $10,000, which can bite hard in Illinois, which has high state-income taxes and very high real-estate taxes.
You are limited to deducting only the mortgage interest on new loans up to $750,000 (was $1 million before), and you may not be able to deduct the interest on home equity lines.
The medical expenses threshold is lowered. Now, you can take as an itemized deduction for anything over 7.5% of your adjusted gross income (AGI) BUT…
You can no longer deduct miscellaneous expenses such as unreimbursed employee expenses and investment-related fees and all other professional fees. Also…
You can no longer deduct personal casualty and theft losses unless they derive from an official disaster and…
If you are in a position to donate a lot of your income to charity, the maximum deductible donation is raised from 50% to 60% of AGI. Unless you are getting college sports tickets in return, when you cannot deduct at all.
There is a new deduction for Qualified Business Income, which generally means that you will only pay tax on 80% of income that comes from a pass-through entity such as a sole proprietorship, a partnership, an S-Corp, and LLC or a trust.
Then there are changes to certain credits. The child tax credit, for example, was increased from $1,000 per qualified child to $2,000, and the income phaseout threshold is higher. You can also take a $500/person non-refundable credit for dependents other than qualifying children.
So the question of whether your tax situation will be better or worse than last year is a very complex one, even if your tax situation is relatively simple. Let’s say you are a couple with one minor child and one adult child (over 17) with a disability living at home. Last year, you itemized because you had more than $12,700 in deductions that way. And you were able to take $16,200 in exemptions to account for yourselves and for your two dependents. Even if you have as much as $23,990 in itemized deductions, you will still take the standard of $24,000. But you will lose the $16,200 that you would have had last year as exemptions for yourselves and each of your children. You may gain some refund money, though, via the increased Child Tax Credit (for children under 17) or via the newly added Family Tax Credit (for other dependents).
The TCJA changes have a particular impact on people with disabilities and their families. People with disabilities may have more medical expenses and unreimbursed employee expenses. Even if they are better off now, taking the higher standard deduction, it may end up being lower than their previous itemized deductions along with their personal exemptions would have been. Similarly, the loss of personal exemptions means that parents or siblings, who claim an adult child with a disability as a dependent, see less deduction benefit from that claim. On the other hand, the adult child with disability may qualify for the new family tax credit whereas s/he had previously been too old for the child tax credit.
People with disabilities, who run their own business, and families that have special needs trusts may benefit when 20% of pass-through income is no longer taxed. Families that donate a significant amount of money to charitable organizations that support their loved ones or people with disabilities in general and families that raise money for their own or other charities, will want to take note of strategies that maximize the tax impact of charitable giving under the new rules. For example, a donor can “bunch” donations every other or every third year such that the larger donation exceeds the standardized threshold in that year, allowing for useful itemization. Donors may want to use a Donor Advised Fund to hold and invest a single large donation. The entire donation an be itemized in the year made, but gifts from the fund can be made over subsequent years.
A final point to mention. Even though some people will be assessed less income taxes under the TCJA, they may not get a refund. The IRS revised its withholding tables effective 2018. In most cases, employers withheld less. This means that you may have paid less of your eventual tax bill than you think. Keep in mind that you did benefit from more money in your pocket throughout the year. Please see your tax professional to make sure you get the most you can out of the new rules.
Had Benjamin Franklin lived a in our day, he might have worded it differently: “With regard to taxes, the only constant is change.” You may have to deal with a Rube Goldberg machine when it comes to doing your taxes, but as long as you know how to deal with extra steps, then you can increase the chances to maximizing your returns.