You might be surprised to see you owe taxes this year when you were expecting to pay less taxes due to the tax law changes. Many Americans did pay less compared to 2017 taxes but less tax was taken out of their paycheck and the cumulated effect was they owed more when they filed.
Below are a few of the key changes to the tax law for this filing season:
- Tax Rates Dropped (& some income thresholds increased in higher brackets):
From 2017: 10% 15%, 25%, 28%, 33%, 35%, 39.6%
To 2018: 10%, 12%, 22%, 24%, 32%, 35%, 37%
- Standard Deduction increased:
From 2017: Single ($6.35K), MFJ ($12.7K) Head of House($9.35K)
To 2018: Single ($12K), MFJ ($24K) Head of House($18K)
- Personal Exemption Deduction was removed
From 2017: $4.1K per personal exemption (no limit for # dependents)
To 2018: Eliminated
- Child Tax Credits Increased & Expanded & phase out income thresholds increased
From 2017: $1K per qualifying child under 17
To 2018: $2K per qualifying child under 17
2018: $500 per qualifying child 17 to 24 and non-child dependents
Note: the previous personal exemption deduction lowered your income level from which you were taxed but the child tax credit is a dollar for dollar direct reduction to the taxes you owe. So a $500 credit is far more valuable than a $500 deduction.
Also, the income phase out thresholds are significant higher than last year which made the child credits available to far more people than previous years. The credits are available to many who previously did not get the dependent reductions due to the alternative minimum tax.
There were many more changes that are too lengthy to address here. One of the downsides of the new tax law is it took away the deductions for employee expenses. The tax laws have always favored the self-employed and business owners over the employed. If you are an employee and your employer is not offering retirement plan matches, flex spending accounts, vacation/sick time and just pays 50% of your self-employment tax consider switching to a 1099 contractor. In future blogs I will be addressing tax benefits of being self employed or doing a side business. In the meantime, as we near April 15th consider the following 2 options to reduce your taxable income if you have not already done so.
- Contribute to an HSA (Health Savings Account) if you have a high medical deductible.
Limits are $6.9K/family & $7.9K/family if >55yrs old
- Max out retirement plans (e.g., SEP IRA, Solo 401Ks)
If you do not have the cash to fund those consider filing an extension, pay your taxes due on April 15 to avoid the penalty and then pay the max limits on your HSA and retirement plans (SEP IRA and 401K only, traditional IRAs & Roth IRAs must be funded by April 15th) when you can afford it before the extended October deadline to reduce your taxable income