The new tax laws were aimed to simplify tax exemptions, but the final result may hurt some taxpayers. At first glance, it seems as if everyone would choose to use the standard deduction but it is important to understand your best option in 2019 after the 2018 Tax Reform Bill. Generally, one would choose to itemize only if the end result adds up to more than the standard deduction. Here are 5 things everyone needs to know about the most recent tax reform.
First off, the standard deduction has roughly doubled.
The standard deduction is a far simpler route to take when filing taxes. It is an automatic deduction that allows a tax payer to reduce their taxable income by a set amount. With the standard deduction, you do not have to itemize every action or add up each deduction you deserve. In 2017, the standard deduction for a single person was $6,350 and in 2018 it was boosted to $12,000. The changes to married taxpayers filing jointly similarly jumped from $12,700 to $24,000. After this reform, the number of Americans choosing to itemize their deductions is estimated to fall from 26% to less than 8%. Why should you choose to itemize?
With the standard deduction nearly doubled, it may seem too good to be true. What gives?
Exemptions and credits based on dependents have completely transformed.
Before the tax reform, one could deduct $4,050 for themselves, their spouse, and each dependent in the household from the personal tax exemption. For larger families, this deduction was extremely valuable as it easily surpassed the standard deduction when there were several children in the house. All hope is not lost though for larger families because of the Child Tax Credit doubling from $1,000 per child to $2,000. Though there are income limitations and age restrictions for the credit, credits can be much more valuable than a deduction. A credit is actually a real dollar for dollar amount that is reduced from what you owe the IRS while a deduction only deducts from your taxable income.
Charitable contribution deductions have increased their limit.
Before the reform, Americans who chose to itemize their taxes were able to deduct charitable contributions up to 50% of their adjusted gross income. After the tax reform, the limit has been moved to up to 60% for cash contributions only. This means that your charitable contributions can make 10% more of a difference in deduction from your taxable income- which is monumental for those who make a lot of donations. On the downside, certain school donations such as required monetary donations to be allowed to purchase athletic tickets are no longer deductible.
Mortgage interest deductions have new rules.
For employees who made purchases on the job that were not reimbursed, they can no longer have this deduction of up to 2% of their income. Relocation and moving expenses for jobs are also no longer tax deductible unless it is for the military. Alimony is also no longer deductible from federal taxes because it is not taxable to the receiver.
These are just a few of the tax changes made as a result of the 2018 Tax Reform bill. As these changes make their way to form a path for all Americans in 2019, it is essential to work alongside an expert on these reforms. Though many deductions have been changed or eliminated, the standard deduction is not always the best route for everyone. SME CPAs has these experts that are needed to allow you to receive as much return on your taxes as you possibly can. Give us a call so that we can show you how we can help.