Does the New Tax Law Increase or Decrease Your Tax Bill?
Major changes in the tax code were brought about with the Tax Cuts and Jobs Act in 2017. The Affordable Care Act (ACA), elimination of many itemized deductions, and changes in tax credits and deductions — it’s not been easy for taxpayers to stay on top of it all. The only question worth asking is: Did you pay more or less in taxes after the overhauling of the tax code?
Whether the changes increased or decreased your tax bill depends upon many factors. The standard deduction has increased substantially, larger child tax credits and lower income-tax rate are the more beneficial changes that brings down your overall tax bill. However, many of the deductions and major tax breaks ended along with personal exemptions. The state in which you live also impacts your taxes due to the cap of $10,000 on State and Local Taxes (SALT). Barron’s shares what you can do to bring down your tax bill this year:
“Does it still pay to itemize?
Probably not. The standard deduction has nearly doubled: For a couple filing jointly, it’s now $24,000, up from $13,000; for individuals, it rose to $12,000 from $6,500; and it jumped to $18,000 for a head of household.
Taxpayers could see considerable savings if their deductions are well below the new limits. A lot of households have deductions greater than $13,000 but less than $24,000, says Christopher Hesse, principal in the national tax office of tax-planning firm CLA. They’ll benefit from the changes.
But people with more substantial itemized deductions–like those who live in high-tax states–will see much less of a benefit or none at all.
What about the AMT?
It hasn’t disappeared, but it has been largely defanged. The cap on SALT means that fewer taxpayers will be subject to the AMT–high itemized deductions were increasingly subjecting people to this alternative tax that was originally intended to apply to only the extremely wealthy who have a lot of complicated deductions. (The AMT is calculated by adding back certain deductions to total income, and then applying AMT rates.) Congress also raised the amount of income that’s exempt from the AMT. For a married couple filing jointly, the new exemption is $109,400, up from $86,200. The exemption phases out at $1 million of AMT income, up sharply from the prior threshold of $164,100.
A new deduction for small-business owners: Partnerships and other ‘pass through’ entities are getting their own tax breaks. Congress created a new, 20% deduction for ‘qualified business income,’ or QBI, that comes from a partnership, sole proprietorship, S corporation, trust, or estate–in other words, you won’t owe tax on 20% of that income. Dividends or income payouts from real estate investment trusts and master limited partnerships also qualify (but not the return of capital that constitutes most of an MLP’s payout). Rates on capital gains and qualified dividends remain the same (though they’re now indexed to income levels rather than tax rates). The QBI has certain limits.
Is there anything I can do to lower my tax bill?
A little. Deductions for charitable donations and home-office expenses are still allowed, and taxpayers can still deduct mortgage interest (up to a new limit on $750,000 of debt for primary home mortgages taken out after Dec. 14, 2017). But Congress eliminated many other breaks, including deductions for job-related moving expenses, home-equity loan interest (unless the loan is used for home improvement), unreimbursed work expenses (such as travel, parking, and meals), investment advisory fees, and job-search expenses. Congress also eliminated a deduction for tax-preparation fees, making it costlier to hire an accountant to figure it all out.
Nonetheless, one technique that tax planners now recommend is bunching deductions or expenses. The idea is to front-load a return with enough deductions to make itemizing worthwhile.”