A Quick Review of Tax Changes That Could Impact You

A Quick Review of Tax Changes That Could Impact You

by Brandon Miller on Mar 25, 2019

Tax, Education

Remember that scene in Gone with the Wind where Scarlett O’Hara says, “I can’t think about that right now. If I do, I’ll go crazy. I’ll think about that tomorrow.” That might have been your reaction when the new tax bill passed in late 2017. Why think about all of the changes and how they were going to impact your tax bill until you had to?

Well, now you have to.

The new laws are kicking in for your 2018 taxes, so fluff up your petticoat, tie your bonnet and pinch your cheeks while I take you on a quick tour of the most important changes.

The first thing you’ll notice is the 1040 form itself. There is now just one form for everyone. Forms 1040-A and 1040-EZ have been eliminated to get rid of any confusion about which one to use. While not quite the postcard we were promised, the new 1040 is much shorter.

Unfortunately, everything that was removed from the form itself is now on six schedules. While there are people who will be able to file just the 1040, there are also many who will have to file one or more schedules.

Part of the impetus behind the shorter form is that tax filing will be greatly simplified when fewer people have to itemize. To make that happen, Congress nearly doubled the standard deduction. Married-filing-jointly taxpayers get a $24,000 standard deduction, up from $13,000, and individual filers go from $6,500 to $12,000.

Terrific. Except the personal exemption has been completely eliminated. The personal exemption was over $4,000 in 2017. And you could subtract that amount for yourself and each of your dependents, making this loss painful for large families.

But wait! The Child Tax Credit has doubled to $2,000 per dependent child under age 17. Also starting in 2018 is a new $500 credit for dependents that don’t meet the Child Tax Credit criteria, such as elderly relatives or children older than 17.

Now to the change with significant impact in California—the cap on the State and Local Tax (SALT) deduction. People who itemize used to get an unlimited deduction for their state individual income, sales and property taxes. In fact, the SALT deduction was one of the main reasons for itemizing.

Under the new law, the deduction is limited to $10,000. Here in the Bay Area, that may not even cover the first property tax payment for some homeowners. And if you have multiple properties, sorry, you’re still limited to that 10k. Same story if you’re married. The SALT deduction is $10,000 if you file jointly or $5,000 each if you file individually, which really amounts to a marriage penalty since two unmarried taxpayers get an aggregate of $20,000 to write off.

At least the source of the most common marriage penalty has now been virtually eliminated. With the new tax rates, Congress essentially doubled the income thresholds for single filers (except for the top two brackets), so married couples don’t face a higher tax bill unless they make over $400,000.

The last big change is the qualified business income deduction. This was added to help small businesses that didn’t benefit from the breaks given to large corporations under the new law. Owners of sole proprietorships, S corporations or partnerships may deduct up to 20% of the income their business earns. There are exceptions and limitations to this deduction (of course!) and the language isn’t crystal clear about certain points. So, if you think you may qualify for this fabulous deduction, you may want to consult with a tax professional.

With all of these changes, it’s hard to know whether you’ve been helped or hurt by the new tax bill until you actually file. If you find yourself on the “hurt” side of the spectrum, it may be smart to talk to a financial professional about changes you can make to lower your tax burden for 2019, because as Scarlett reminds us, tomorrow is another day.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Brio cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Brio does not provide tax or legal advice, and nothing contained in these materials should be taken as such. To determine which investment may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

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