Tax season comes quickly after the year comes to a close.
In 2018, a few changes have occurred due to legislation that was created by the Tax Cuts and Jobs Act of 2017. One of the main changes was a lowering of tax rates and a near doubling of the standard deduction. Also, a number of expenses that were allowed as itemized deductions in previous years have been severely restricted or eliminated. It helps to understand which changes were made so that you can get ahead of preparing your return. Here are some of the changes that were made that may affect you in 2018:
Changes to Itemized Deductions
In 2018, tax bracket numbers stayed the same. However, rates were reduced. The tax rate at the top of the scale was lowered to 37 percent. While the standard deduction increased, other changes to allowable itemized deductions may mean that you will actually have a higher tax bill to pay.
Tax prep fees, investment expenses, foreign real estate taxes paid, home equity loan interest that wasn’t used for home improvement and personal exemptions are no longer allowable as itemized deductions. Alimony payments for any divorce that is finalized in 2019 or after will also be added to that list and be applicable in 2019.
A Change to Charitable Donations
Charitable donations can only be used as a deduction if you decide to itemize. However, if you do itemize and have any cash contributions that were made to public charities, those can be deducted by as much as 60 percent of their AGI, which is up 10 percent from the previous limit which was 50 percent.
Tax Reform Only Offers a Few New Opportunities
There was a change in 529 plans. You now have the ability to use as much as $10,000 per year from the plan to pay for tuition related to kindergarten through 12th grade. The advantage of using a 529 plan is that it provides tax-free withdrawals and tax-free growth at the federal level for all qualified expenses.
Another change involves S corporations, partnerships and sole proprietorships. If you own one of these businesses, you may be eligible for a 20 percent deduction. However, this deduction does have some contingencies related to the type of business and the amount of income received.
Changes to the Alternative Minimum Tax for Individuals
There were also changes made to the Alternative Minimum Tax (AMT) for individuals. If you are married and filing jointly, exemptions have been raised to $109,400. If you’re single your exemption has been raised to $70,300. These start to phase out at the $1 million level if you are a couple and $500,000 if you’re single.
What is the Best Way to Prepare
It’s always a good idea to get stared as soon as possible before the end of the year to understand how any changes in the tax reform will affect your filing. It also helps to use a professional tax advisor or CPA who understands the nuances of the new tax act. You want to make sure that you pay the appropriate amount for estimated taxes or for your withholding tax for the year.