As you are undoubtedly aware, Congress actually did something. In December they passed the Tax Cuts and Jobs Act of 2017. The legislation was promoted as both a tax cut and reform of the code. By a tax cut, obviously I mean a reduction in your tax bill. Tax reform, to me, usually means a simplification. Whether these things actually happened depends on your personal financial situation. And are the changes something you would actually notice?
Just to be clear, the changes are for this year-tax year 2018. The tax code for last year, for the return that will be prepared this spring, is unchanged.
Rates were marginally cut, but we are usually murky as to our actual tax rate. Taxes on the sale of stock, mutual funds, etc. will likewise decrease. However, as expected, the reduction primarily affects higher income individuals.
The average citizen will see the biggest change in the standard deduction. After totaling all income (basically the first page of your Form 1040), the taxpayer compiles all allowed deductions-such as mortgage interest, property taxes, and charitable contributions. If the total is larger than the standard deduction (and personal exemption described below), the compiled total is used to offset income. If the standard deduction is larger, it is used. The standard deduction somewhat levels the playing field for those who do not have a mortgage, house or are not major contributors to charity.
In addition to the standard deduction, the old tax law gave an exemption (i.e. personal exemption) for every person in the household. The personal exemption has been done away with (though the child credit was enhanced to help larger families), but the standard deduction is doubled. The result is a slight tax benefit for individuals and married couples as shown below.
More people will end up taking the now larger standard deduction rather than itemizing. In fact, the Joint Committee on Taxation estimates that 94% of households will claim the standard deduction in 2018, up from about 70% now. On your tax return, this result has been reflected on Line 40 of your Form 1040. If the amount on Line 40 is less than $20,800 ($10,400 for individuals), your taxes are “cut and reformed” as you will claim the now larger standard deduction – reducing taxes and simplifying record-keeping (you will not have to prove deductions). Even if your deductions are still larger than the standard deduction, your total tax bill could still be reduced.
Of course there are many other changes with the new tax law, especially the deductibility of mortgage interest and state & local taxes. The effect on charitable contributions will be interesting to watch.
A big winner with the tax change are corporations. I know, I know – the benefit of the reduction is to stimulate the economy. Time will tell if the economy is indeed stimulated.
I have always felt that the average person has limited control over his taxes. Nevertheless, you do not want to leave “money on the table.” We can review your finances to make sure you are taking advantage of all the changes in the new law. See our website (www.wfrplanning.com/services) for more information on our tax planning services.
This information is provided as an informal report; no warranties as to the accuracy or content are implied or expressed. No representations or warranties are being made as to the ramifications of effecting any of the above alternatives, or the legal effect of the enclosed information. All information contained herein must be qualified by your professional legal and accounting advisors.