The pace of the news cycle lately is approximately the speed of light, so it’s hard to keep up with all the information coming at you. So you can be forgiven if you haven’t been tracking the changes to the tax law. After all, they don’t go into effect until next year, and you probably just wrapped up your 2017 tax filing not too long ago.
It’s never too soon to start planning for the next tax cycle, though, and this year there are big changes to the law. President Trump signed the Tax Cuts and Job Act of 2017 into law back in December, and all of the changes to the tax code apply to the money you’re earning right now, in 2018 — and will affect the way you fill out those dreaded tax forms next winter. The 2019 filing season may feel far away, but it will be here before you know it.
Tax Deductions and You
For savvy people looking for a way to hang on to their hard-earned cash, tax deductions have always been a reason to celebrate. If you keep track of your paperwork, they often feel like little bonuses peppered throughout the boring, complicated paperwork that comes with doing your taxes — like Easter eggs for money nerds.
If your M.O. in the past has been to troll the internet looking for little-known tax deductions to take advantage of, you’ll want to be very careful this year. That’s because a lot of the “hidden” tax deductions that were available in the past have disappeared with the new law. Here’s how it breaks down:
The Good News: What You Get
The changes to the tax code make sweeping changes that have benefits for many people looking to save on their tax bills. Here are the biggest benefits:
- Lower Tax Rates: In 2018, there are still seven tax brackets, but six of them have been adjusted to tax at lower percentage. In 2017, the tax rates were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. In 2018, those rates have been lowered to 10%, 12%, 22%, 24%, 32%, 35% and 37%, respectively. This means that if your income puts you in the second tax bracket, you’ll only pay a 12% tax this year instead of a 15% one.
- Bigger Standard Deduction: The biggest news for most people is that the standard deduction has almost doubled. Single taxpayers could only deduct $6,350 in 2017, but get a standard deduction of $12,000 for 2018. For married people, the standard deduction is $24,000. That’s a lot less money you have to pay taxes on, which is good news for everyone. For many people, this also means that filing your taxes could be much simpler. If your itemized deductions aren’t anywhere close to the standard deduction, you can make life easy and go with the bigger standard deduction without worrying about saving receipts and paperwork.
- Pass-Through Entity Deductions: If you work for the man, this doesn’t apply to you, but if you have a side gig, small business or work as a sole proprietor, for some or all of your income, you might be able to deduct 20% of the earnings — a potentially huge tax cut. It’s a complicated new provision, but if you earn less than $157,500 as a sole proprietor, you can take advantage.
The Bad News: What Your Lose
Alas, the government giveth, and the government taketh away. The new tax law eliminates a whole slew of deductions that you maybe know and love:
- Personal Exemptions: In the past, you were able to claim a personal exemption of $4,050 for yourself or for each dependent. Not any more, which means that four grand is up for taxation. The newer, larger child tax credit of $2,000 per child might help make this hurt a little less, but not all dependents are children. If you care for an elderly parent or a college-age child, you’re out of luck.
- State and Local Tax Deductions: This isn’t totally gone, but it’s limited to a deduction of $10,000. If you pay a lot of state income tax or very high property taxes and used to itemize to claim a deduction for all of it, you’ll now be capped. This is most likely to hurt homeowners in states like California and New York, but it’s worth a look if you’ve ever claimed your real estate taxes by itemizing in the past.
- Home Equity Loan Interest Deductions: This also hasn’t disappeared, but you now can only deduct the interest paid on debt used for actual home improvement. If you used your HELOC to buy a car or pay for tuition, you’ll have to be careful in sorting out just what percentage of the interest is actually deductible now.
- Miscellaneous Deductions: If you ever saved receipts for your unreimbursed job expenses like that snazzy uniform or dues to professional groups, you can throw that folder away. All the old miscellaneous deductions (including tax prep fees, union dues and gambling losses) have been cut. On the bright side, these were a pain to keep track of. If you’re a unionized worker with a mandatory uniform and tools that you buy on your own, though, you might feel this one.
What It Means for You
So will you come out ahead with all the changes in the deductions you take? If you’ve never itemized before and you have kids living at home with you, the answer is probably yes. If you were a die-hard itemizer, it’s much harder to predict whether you’ll still have enough deductions to push you over the standard deduction or not. There have also been changes to the tax bracket income thresholds — particularly in the third through fifth brackets — that might actually be worse for you, depending on what you earn.
The Bottom Line: Save your receipts this year until you know whether itemizing is still worth it for you when you file. Save your money and pay any quarterly taxes as if you weren’t getting a tax cut, and then you may be pleasantly surprised next April.