As tax professionals, like most of you, we are glad that April 15th has come and gone and another tax busy season is behind us. Now that 2017 is in the review mirror it is time to start planning for your taxes for 2018. The actions you take now can affect your taxes later.
On December 22, 2017, President Trump signed into law a new tax reform (Tax Cuts and Job Act) that went into effect starting January 1, 2018. One of the major issues that everyone needs to take into consideration is how this new tax reform will affect them personally, as well as their businesses. In the coming months, Isler CPA will be publishing multiple blog posts around various aspects of the new tax law and how it can impact taxpayers (business and individuals). Stayed tuned for future blog posts.
Tax Reform for Individuals
Today’s blog post will focus on some of the tax law changes that will have the biggest impact on your personal tax return (Form 1040). Various changes to the law can have a positive or negative affect on your 2018 taxes (increase or decrease your taxes), therefore it pays to be well informed. The following are some of the key tax law changes that we want to emphasize:
1. First and foremost, one of the biggest changes to the tax law is the change in tax rates for individual taxpayers. Prior to the tax law change there were seven tax brackets which were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. After the tax law change there are still seven tax brackets, however, the rates have been reduced to 10%, 12%, 22%, 24%, 32%, and 37%.
As you can see, if this had been the only tax law change, everyone would be paying less in taxes, however, rarely is a tax law change that simple.
The following charts provide a side by side comparison of the old and new tax brackets for single filers and married filing jointly filers.
2. The second major change in the tax law for individuals is that personal exemptions are suspended until 2026. Prior to the tax law change, a taxpayer could claim an exemption for the taxpayer as well as his or her spouse (if married filing jointly), and dependents (within some limitations and phase outs) in the amount of $4,050. The total exemptions would then reduce an individual’s taxable income and reduce his or her tax burden.
With the new tax law, the personal exemptions are not allowed to be deducted / are suspended until tax years beginning on or after January 1, 2026. As you can see this is not a taxpayer friendly change in the law and has the potential for increasing the taxes for some taxpayers.
3. The third and final major change in the new tax law, which we will address, is the change in the standard deduction. Under the old tax law, the standard deduction for individuals filing single was $6,350 and for married filing joint was $12,700.
With the new tax law changes, the standard deduction amount almost doubles. The standard deduction for individuals filing single increases to $12,000 and for married filing joint it increases to $24,000.
Overall, this generally should have a positive affect (help reduce taxes) for most taxpayers.
In general, the combination of these three tax law changes should reduce the tax burden for taxpayers in 2018. However, there are situations where these changes may have negative impact (raise taxes) for some taxpayers. If you have questions about how these tax law changes can affect you, please contact us here at Isler and we can help you obtain a better understanding.
These are only three of the many tax law changes that occurred with the signing of the 2017 Tax Cuts and Job Act. Make sure to check back for future blog posts about additional changes and how those changes can affect your tax situation.