4 Must Know Tax Law Changes for 2018 Tax Season
The Tax Cuts and Jobs Act (TCJA) have brought significant changes to the ways in which creatives, solopreneurs, and small business owners file their taxes. We highlighted the 9 tax deductions your small business may be missing, suggesting that it is highly advised to meet with a tax professional to discuss your business’s unique situation to ensure that you are not overpaying and file your taxes accordingly. We have put together the 4 must know tax law changes for this 2018 tax season.
1. State & Local Taxes
State and local tax (SALT) deduction allow taxpayers if they are filing in high-tax states to deduct the amount they have to pay in local tax from their federal tax returns. The limitation made on state and local taxes is subject to a maximum deduction of $10,000. With this new limitation on state and local taxes, higher income filers can expect to not only be taxed at a higher rate but will be more likely to take this deduction, compared to those with low or no income tax.
“Under prior law, you could claim an itemized deduction for an unlimited amount of personal state and local income and property tax. You could also choose to forego any deduction for state and local income taxes and instead deduct state and local general sales taxes.” [LINK]
2. Standard Deduction
The standard deduction reduces the overall amount of income you have to pay taxes on. While the IRS does not allow for individuals to take both the standard deduction and also itemize on a tax return, however, you can choose to take the standard deduction even without having no other such qualifying deductions or tax credits.
Itemizing, although a more lengthy process, could end up saving individuals more money than using the standard deduction. It is advised to calculate both your standard deduction and your itemized deductions to see which will be worth taking and also save you the most money.
3. Personal and Dependent Exemption
As mentioned above, the TCJA has nearly doubled the standard deduction rate for 2018, however, there is no longer personal and dependent exemptions. Married joint-filing couples standard deduction amount is $24,000, previously $12,700 and singles deduction has increased from $6,350 to $12,000. Personal and dependent exemptions previously would have been $4,150 each, eliminating this deduction will alternatively benefit some taxpayers but harm others.
Under this new tax plan, while the standard deduction nearly doubled, together with the child tax credit being raised to $2,000 per child and a $500 credit that is claimable for some dependents that don’t qualify for the child tax credit, individuals may or may not be entitled to an additional deduction.
4. Tax Rates
Tax rates have overall lowered, in addition, the tax reform brings about a change in income thresholds. The new bracket will be 10%, 12%, 22%, 24%, 32%, 35% and 37%, the current thresholds are then dependent on filing either married joint, single, and so on.
Turbo Tax highlights that for self-employed (contractors, freelancers, sole proprietors, and small businesses:
“The bill has a myriad of changes for business. The biggest includes a reduction in the top corporate rate to 21%, a new 20% deduction for incomes from certain type of “pass-through” entities (partnerships, S Corps, sole proprietorships), limits on expensing of interest from borrowing, almost doubling of the amount small businesses can expense from the 2017 Section 179 amount of $510,000 to $1,000,000, and eliminates the corporate alternative minimum tax (AMT).” [LINK]
Standard Tax Deductions: https://www.nerdwallet.com/blog/taxes/standard-deduction/
Other Tax Law Changes for Your 2018 Personal Return: https://www.marketwatch.com/story/the-10-tax-law-changes-that-will-most-affect-your-2018-personal-return-2019-01-22
Changes to State and Local Tax Deduction - Explained: https://smartasset.com/taxes/trumps-plan-to-eliminate-the-state-and-local-tax-deduction-explained