The U.S. government quietly overhauled the tax code with the Tax Cuts and Job Act. They passed the law in 2017, and big changes apply to taxes for the 2018 tax year, the 2019 tax year and beyond. The tax changes are big, and most taxpayers are going to notice when they begin to prepare their 2018 taxes.
What are the U.S. tax changes in 2018?
The 2018 U.S. tax changes increase the standard deduction. At the same time, the changes reduce the things that people can claim as itemized deductions. The net effect is going to be that fewer people itemize their deductions and just take the standardized deduction instead. There are changes to withholdings and changes to the percentage rates of certain tax brackets.
How do I prepare for the 2018 tax changes?
With a little bit of advance planning, you can be ready for the 2018 tax changes. You may not realize how big the tax changes are until you begin to work on your 2018 taxes. If you don’t make adjustments, you might be in for a good – or bad – surprise come tax time. Of course, with some planning, you can avoid tax surprises in 2019. Here are 8 ways to avoid tax surprises in 2019:
1. Review your withholdings for 2018
The best way to avoid a surprise tax bill in 2018 is to review your withholdings. Your withholdings are the amount that your employer keeps from your pay and sends directly to the IRS. If your taxes are going up with the proposed changes, you want to make sure that you adjust your tax withholdings so that you’re taking out enough from each paycheck.
Of course, whether you need to increase your withholdings or you can rest easy depends on an estimate of your overall tax liability. Even with changes that drastically reduce things that you can deduct, many people are going to pay less in taxes overall than they did before. On the other hand, if you’re on the losing end of the changes, you might have to write Uncle Sam a check. A mid-year review of your withholdings can prevent you from having April 15, 2019 come with financial setbacks.
2. Stay on top of standardized deductions
The old tax code had both standardized deductions and personalized exemptions. Standardized deductions are the amount that taxpayers can deduct from their income. Exemptions are an amount of income for each person that’s exempt from taxes.
Under the new tax code, standardized deductions are up, and personal exemptions are out. The new tax code increases the standardized deduction to $12,000 for one person and $24,000 for a couple filing jointly. That’s a big increase over the prior standardized deductions. At the same time, personal exemptions are completely eliminated for everyone.
Fewer people qualify to itemize their deductions under the new tax code. If you’re going to make the jump from itemized deductions to standardized deductions, it’s helpful to know ahead of time so that you can go about your business accordingly. It’s also important to know what expenses are no longer deductible from income.
3. Cap on state and local taxes
If you don’t look twice, you may get a big surprise when you find out that the new tax code caps state and local taxes at $10,000. For families who pay property taxes, they may quickly reach the ceiling. Before, property taxes may have just been seen as par for the course, but now, there’s even more incentive to fight your property tax assessment and lower that local tax bill.
4. Elimination of unreimbursed employee expenses
Most people put at least some of their own money into their work even if they’re an employee. If you’re a teacher, you buy supplies. If you’re an office manager, you might pick up a ream of paper in an emergency. Under the old tax code, employees could deduct unreimbursed business expenses. In the new code, that’s no longer the case. If you pay significant amounts of your own income towards your job, now is the time to renegotiate reimbursements or a pay raise to cover the cost.
You may have a rough time paying the tax bill when you find that the new code doesn’t allow for employee expenses. Teachers may still deduct a limited amount for classroom expenses. In addition, business expenses are still deductible.
5. Make charitable changes
Americans are among the most generous people on earth. With the new tax changes, you may get more bang for your charitable buck by grouping your charitable donations into the same year. For example, you can make twice the deductions in 2019 and then give nothing in 2020. That way, you can take itemized deductions in one year instead of falling into the standardized deduction category two years in a row. The amount of income that you can deduct for charitable contributions increases under the new tax code.
6. Make charity pay with IRA giving
One way to avoid the sting of the new tax code is to give to charity from your IRA. Giving contributions directly from the IRA to the charity lets you avoid counting the IRA withdrawal as income only to take a standardized deduction that doesn’t account for your charitable gift.
7. Your home is no longer an office
People work at home these days more than ever before. Unfortunately, if you’re an employee, you can no longer claim a deduction for your home office. If you’re self-employed, the home office is still a deduction. For everyone else, home is only home from now on.
8. Child tax credits are going to increase
The child tax credits are better for everyone under the new plan. The credits are higher, the maximum income to qualify is higher and even the definition of who is a qualifying child has expanded. The good thing about the child tax credit is that it’s a direct deduction from your tax liability and not a deduction from your taxable income. It’s a straight credit of the dollars you owe in taxes. Under the new tax code, $1,400 of the child tax credit is refundable, so it can even put dollars in your pocket.
Planning to avoid tax surprises in 2018
Paying taxes is never fun. There are a lot of changes in 2018 and again in 2019. The right planning can help you avoid surprises and use the new tax code to your advantage. The professionals at Wilson Ratledge can help examine your case in order to structure your personal and business taxes in the best way possible.