7 of the Changes to Tax Law That Taxpayers Need to Know

7 of the Changes to Tax Law That Taxpayers Need to Know

While the 2017 tax season was largely business as usual, things will be very different in the 2018 season because of the new laws that were passed in late 2017. To maximize returns, or at least minimize how much is owed, individuals need to start thinking about the changes they need to make to their normal processes.

Millions of people will experience radical changes to their tax preparation process, so it will be beneficial to consider how these changes will impact you early in the year. Few people outside of tax preparation professionals will go through the Tax Cuts and Jobs Act bill meticulously, since it is more than 600 pages long. However, below are some of the changes that people need to know about so that they can make the new law work in their favor.

 

  1. Elimination of the personal exemption.

One of the most critical changes made in the new tax law is the elimination of the personal exemption. Because of this change, individuals should request a W-4 and verify their withholdings and make any necessary adjustments. The IRS now has an updated withholding calculator that people can use to determine the appropriate withholding.

Individuals who do not change their withholding may end up owing money instead of getting a refund, since it is possible that not enough money will be withheld from each paycheck. Employees can talk to human resources representatives to adjust their withholdings.

taxes

 

  1. Increases in the standard deduction.

The standard deduction that people can claim on their returns has been dramatically increased starting in the 2018 tax year. Now, single people have a standard deduction of $12,000 and married couples will deduct $24,000. Because of this change, far fewer people will itemize their deductions.

One of the primary aims of the new bill is simplifying the income tax process by minimizing the number of people who need to go through the itemization process. Individuals may want to talk to a tax professional about their personal situation to figure out whether or not it makes sense to continue itemizing deductions.

 

  1. Expansion of 529 plans for private school tuition.

People may want to consider paying private school tuition through a 529 plan. Under the new law, 529 plans can now be used for all private school tuition from kindergarten to college. However, personal annual spending from the plan is capped at $10,000.

While money that is invested into these plans is still taxed as income, withdrawals are tax-free. The real benefit comes from state tax deductions and credits for families who put money in these plans. People should see what tax advantages their states offer in connection to 529 plans. More than 30 states provide incentives for investing in 529 plans.

 

  1. Restrictions on home-equity loan deductions.

Under the prior tax law, homeowners could use home-equity loans to pay down debt or make large purchases since the interest paid on these loans was tax deductible. The new bill only allows people to deduct interest if the loan is related to acquisition indebtedness. This confusing term means that individuals need to use the money to build, buy, or renovate a home if they want to deduct the interest. Otherwise, the interest paid on the loan is counted as taxable income.

home

 

  1. Adjustments to retirement savings accounts.

Proposed changes to retirement savings caused some concern, but the final law has some benefits for people saving for the future. Employees with a 401(k) or 403(b) can contribute up to $18,500 in 2018, which is slightly more than in 2017. Most 457 plans and the Thrift Savings Plan also qualify.

A phaseout was implemented for tax-deductible contributions to individual retirement accounts (IRAs) when individuals are also covered by a workplace retirement plans. For IRAs, single taxpayers have a limit of $63,000 to $73,000. For married couples, a spouse with access to a workplace retirement plan has a phaseout range of $101,000 to $121,000.

People who don’t have access to a retirement plan but are married to someone with access face a phaseout of $189,000 to $199,000. For Roth IRAs, single filers have a phaseout of $120,000 to $135,000 and married couples have a phaseout range of $189,000 to $199,000.

 

  1. Caps on new mortgage interest deductions.

People who took out mortgages before December 15, 2018, continue to have a limit on deductions on interest paid for mortgage debt of up to $1 million. However, homeowners who took their mortgages out after that date have can deduct interest on a maximum of $750,000 of mortgage debt.

 

personal information

 

  1. Bigger breaks for large medical expenses.

Under the former tax law, people were able to write off medical expenses only when they accounted for more than 10 percent of adjusted gross income. The new law lowers the threshold to 7.5 percent. Furthermore, this 7.5 percent threshold applies to both 2017 and 2018. While the law does not cover elective cosmetic procedures, individuals can include many expenses related to medical care, such as travel expenses incurred in meeting with care providers.