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As American taxpayers begin to prepare their 2018 tax returns, many are wondering how the tax reform bill will affect them. Recent studies indicated that nearly half of Americans are confused about the law’s effect. Not to worry! Professor Pig is here to review the highlights and help you prepare for the 2019 tax season.
It may seem like there is plenty of time to prepare, but with changes in the law and the lingering effects of the government shutdown in mind, it’s never too early to get started. While those living in areas declared a disaster zone by the federal government such as Maine, Massachusetts, and Washington D.C. may be granted a few extra days to submit their filing, it is best to plan on submitting before the April 15, 2019 deadline.
Find New Forms
Taxpayers will notice a new tax form this year. The shortened Form 1040 is similar to the short-form returns but requires some taxpayers to attach new schedules.
Taxpayers without Social Security numbers will use an Individual Taxpayer Identification Number (ITIN) issued by the IRS. Because these numbers expire, the IRS has provided updated information here.
Know Your Rate
Although the 2018 tax reform bill generally maintained the current tax brackets, it lowered some rates and adjusted the income thresholds where those rates kick in.
|Current Tax Bracket||Current Threshold||New Tax Bracket||New Threshold|
|Single Filing||10%||$0 - $9,325||10%||$0 - $9,525|
|15%||$9,326 - $37,950||12%||$9,526 - $38,700|
|25%||$37,951 - $91,900||22%||$38,701 - $82,500|
|28%||$91,901 - $191,650||24%||$82,501 - $157,500|
|33%||$191,651 - $416,700||32%||$157,501 - $200,000|
|35%||$416,701 - $418,400||35%||$200,201 - $500,000|
|39.6%||More than $418,400||37%||More than $500,000|
|Married Filing Jointly||10%||$0 - $18,650||10%||$0 - $19,050|
|15%||$18,651 - $75,900||12%||$19,051 - $77,400|
|25%||$75,901 - $153,100||22%||$77,401 - $165,000|
|28%||$153,101 - $233,350||24%||$165,001 - $315,000|
|33%||$233,351 - $416,700||32%||$315,001 - $400,000|
|35%||$416,701 - $470,700||35%||$400,001 - $600,000|
|39.6%||More than $470,700||37%||More than $600,000|
While two-thirds of Americans will receive a tax cut in 2018, 6% will, unfortunately, pay more. Generally, this refers to those living in high tax states such as New York, New Jersey, Connecticut, and California.
Determine New Deductions
The 2018 tax reform bill scrapped the personal exemption, but the standard deductions nearly doubled. The standard deduction for the single filing status jumped from $6,350 to $12,000, and the deduction for a married couple filing jointly increased from $12,700 to $24,000.
The bill also increased the child tax credit from $1,000 to up to $2,000 per qualified child under the age of 17 and raised the income limit for the credit to $400,000 when filing jointly. A new, non-refundable credit of $500 was added for dependents other than children.
Under the new rules, the state and local tax deduction remains intact, but the total deductible amount, for income, sales and property taxes combined, is now limited to $10,000. Likewise, the Tax Cuts and Jobs Act maintained the mortgage interest deduction, but beginning this year, the cap on mortgage interest that can be deducted is $750,000, a decrease from the previous principal limit of $1,000,000.
Taxpayers are now able to deduct more for medical expenses. In 2018, the previous limit of 10% of Adjusted Gross Income (AGI) was reduced to 7.5%. The bill also eliminated the tax penalty for those without health insurance.
Watch Your Withholding
As a result of the new tax law, many Americans (an estimated 21%) did not withhold enough from their paychecks in 2018. Larger paychecks last year may be a sign of a smaller refund in 2019, or worse, owing the government money when you file.
The IRS website features a calculator to help you determine whether your current withholding is correct. If you need to make changes, be sure to file a new Form W-4 with your employer.
Revisit the Refund
The increase in standard deductions and child tax credits coupled with the lower tax rates could boost your 2018 refund, but the removal of the personal exemption and other tax benefits could reduce it. In the 2017 tax year, 75% of taxpayers received a refund averaging $2,700. For the 2018 tax year, experts predict an average refund exceeding $3,000 for most taxpayers. However, in some cases, some refunds may be lower than expected as a result of under-withholding in 2018.
Most taxpayers are less focused on the details of the laws, and more interested in knowing how much they’ll receive and when it will arrive. The IRS expects to send refunds within three weeks for electronic filings, and six weeks for those who file on paper. It is important to note that refunds may be delayed for families that are eligible for the earned income credit or the additional child tax credit.
Make a Payment Pledge
Now is a great time to make a pledge to put your refund to good use. Many savvy savers distribute their refund between a variety of savings goals like creating an emergency fund, paying off debt, repairing their home, and saving for college.
Kickstart your 2019 savings goals by creating multiple SmartyPig goals and distributing your refund among them. Along with your automatic recurring contributions, our competitive interest rates and APYs will help you save more and achieve your financial goals even faster!