By Ina Fernandez, CPA President & CEO, Fern Capital Inc.
With April is here and, you may find yourself sympathizing with the Beatles in “Taxman”: “There’s one for you, nineteen for me.” In reality, the significant changes made to the tax laws affecting the 2018 tax year may hold a few pleasant surprises for most of us. Here is a sampling:
Tax Brackets: Tax brackets have changed for 2018. There are still 7 brackets, but the intention of these changes was to reduce taxes paid at lower income brackets. So expect good news in general in this category.
Standard Deductions: The standard deduction almost doubled from 2017 to 2018. For singles, it is now $12,000 (versus $6,350 in 2017). For married couples filing jointly, it is now $24,000 (versus $12,700). This was an attempt to simplify tax returns for the majority of taxpayers who may now be better off taking the standard deduction rather than itemizing as they have in the past.
Child Tax Credit: The new laws eliminated the personal exemption altogether. However, parents can now claim a credit of $2,000 per dependent child under 17 and $500 for other dependents. Further, qualified child-care expenses are still deductible.
State and Local Taxes (SALT): “Should five percent appear too small, be thankful I don’t take it all.” A point of great chagrin was the capping of the deduction for SALT to $5,000 for singles and $10,000 for couples. So Michiganders should count their blessings with a state income tax rate at 4.25%, versus the significantly higher tax rates paid in states on each coast. Keep in mind that in addition to state income tax, property and city taxes are included under the cap, too.
So why am I not getting a bigger refund? This is a question commonly asked by people who have already filed their 2018 taxes. Refunds from returns filed through February 1, 2019 are down 8% compared to prior years. Instead of the refund they are used to getting, some may find they owe this year. Blame the withholding tables. The law was signed on December 22, 2017 and went into effect January 1, 2018. Many of the rules related to the law had yet to be written, so it is understandable that the withholding tables took a while to compile. Also, the IRS appears to have erred on the side of under-withholding. So we have enjoyed the lower rates with higher net paychecks all year, and now the bill comes due. Personally, I prefer to owe rather than get a refund, but some see the refund as getting a chunk of cash to do something meaningful with, rather than spending it on daily expenses all year round.
It’s not too late: You may still be able to increase that refund or reduce your taxes due. You have until April 15 to make a tax-deductible contribution of $5,500 ($6,500 if you are over 50) to an Individual Retirement Account (IRA) for 2018. If you are eligible to participate in a company retirement plan, you may have some income considerations to address. Even if you don’t qualify for the deduction, putting money away for retirement is a good habit. But that is a subject for a different article.