6 ways the new tax law can affect your 2018 tax return
The good news is that this year, nearly 80% of U.S. households will see their tax rates drop, while 90% of workers will enjoy a bigger paycheck. In fact, you may have noticed a recent hike in your take-home pay, as new tax withholding tables kicked in on January 1, 2018.
That said, lower tax rates are just a piece of the puzzle. Last year’s laws are still good for filing your 2017 tax return in April of this year. Any changes that apply to income you earn this year will impact the 2018 tax return you file next year. Here are some of the key changes that could affect your plans:
1. Standard Deduction
Every year, more than 70% of households take advantage of the standard deduction, which reduces the money you’re taxed on by subtracting a flat “standard” dollar amount from your adjusted gross income.
What's different: The new law nearly doubles the standard deduction from $6,350 to $12,000 for an individual and $12,700 to $24,000 for married couples who file jointly. As a result, itemized deductions will essentially disappear once they exceed 2% of adjusted gross income. If you donate to charity every year, pay attention to this change. Charitable deductions, which are among the biggest itemized deductions used by Americans, aren’t going away. But unless you’re in the top tier of taxpayers, chances are you’ll have less incentive to donate. With a higher standard deduction ceiling, most of us won’t reap the tax benefit of itemizing each donation.
In good news for college students (and their parents), the new law doesn’t touch the student loan interest deduction. That means you can, at least for now, continue to claim a deduction of up to $2,500 for interest you pay annually on any student loans.
2. Personal Exemption
Before the new law, you could claim a pre-tax personal exemption of $4,050 every year for yourself, your spouse and each of your dependents, and it lowered your taxable income.
What’s different: That perk has been done away with, largely to offset government revenue lost by boosting the standard deduction amount. According to the Tax Policy Center, removing the personal exemption will cancel out many of the law’s tax relief items and ultimately have a negative impact on middle- and lower-income families.
3. Child Tax Credit & Elder Care
Taxpayers whose annual income is below a certain amount and who have dependent children under the age of 17 can claim a child tax credit (CTC) on their return.
What’s different: The new law doubles the CTC from $1,000 to $2,000 per child and raises the income cap from $110,000 to $400,000 for married couples who file jointly. Even if you don’t earn enough to pay income taxes, you can still claim up to $1,400 in CTC. Another change? You can claim a $500 credit for non-child dependents, a nice little bonus if you’re looking after elderly parents.
4. Medical Expenses
If you were born after 1952, you can deduct medical expenses on your tax return, as long as they equal or exceed 10% of your income. Senior taxpayers enjoy a lower cutoff of 7.5% of their income.
What’s different: The new law expands these deductions to 7.5% for all taxpayers. Great news, right? Sure, except that the lower threshold is only good for the 2017 and 2018 tax years, and you have to itemize your deductions in order to take advantage of it.
5. Mortgage Interest Deductions
Are you a homeowner? This deduction reduces your taxable income by allowing you to write off the yearly interest paid on your home loan.
What’s different: The cap on mortgage interest deductions has been cut from $1 million to $750,000 and applies only to new – not existing – mortgages. Since most homes across the country are valued at less than $750,000, this measure hits cities with pricey housing markets — in New York or California, for instance — especially hard. And you won’t be able to deduct interest on home equity lines of credit anymore.
6. New SALT Rules
Traditionally, taxpayers have been able to deduct state and local taxes (SALT) like income, sales, and property on their federal tax returns. Not anymore.
What’s different: As of January 1, 2018, that amount is limited to a maximum of $10,000 for both individual and joint filers. And you have to choose from among those taxes, instead of deducting them all. Not surprisingly, this change will have a greater impact on residents in high-tax states and may even force retirees to consider moving to states where their fixed-income dollars go further.
Even as you celebrate that temporarily lower tax rate and your fatter paycheck, it’s critical to remember that the new law has both positive and negative implications for taxpayers. That’s why it pays to stay informed and be prepared for what’s changing and how those changes may – or may not – affect your current finances and future tax returns.
This material is provided by Voya® for your education only. Neither Voya® nor its representatives offer tax or legal advice. Please consult a tax or legal advisor before making a tax-related investment/insurance decision.