NEW YORK – Jan. 29, 2019 – Sitting down to do your taxes in the next few weeks – or talking with your tax preparer – will involve tackling the most sweeping changes in the federal income tax rules in more than 30 years.
You’ll need to keep in mind that more than 600 rule changes took place under the Tax Cuts and Jobs Act, which was passed by Congress in late 2017.
All those changes even drove some industry experts to raise concern early on about possible delays to the typical, late January start of the tax season – and that was long before the federal government shutdown hit on Dec. 22. President Donald Trump announced a deal on Friday to temporarily end that shutdown.
Even with that disruption, the Internal Revenue Service promises to kick off tax season as of Jan. 28, the earliest date you can file your returns.
Tax filers need to realize that it won’t be business as usual when it comes to filing their 2018 tax returns. Far from it.
“It’ll be a little bit of a surprise and a learning process as they file their first tax return under the new tax rules,” said Joseph Rosenberg, senior research associate at the nonpartisan Tax Policy Center in Washington, D.C.
Here are key questions to consider as you try to get the biggest possible refund – and hold down your bill – on the 2018 federal income tax returns:
Will the same 1040 work for everyone?
All individual taxpayers will use the same 1040 simple form. It replaces the old 1040, the 1040A and the 1040EZ, according to Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
But it doesn’t end there.
You may need to file supplemental schedules with your 1040 in certain cases, such as if you itemize deductions or qualify for a variety of tax credits other than the basic child tax credit.
Will I or won’t I need to itemize?
Logical question, given that many of us have heard about a much higher standard deduction under the new tax rules. But there’s no simple answer.
“You still want to run your numbers both ways,” said Jackie Perlman, tax research analyst at H&R Block’s Tax Institute, meaning you should try itemizing and comparing the outcome with just taking the standard deduction.
Roughly 10 percent of tax filers will itemize deductions, such as the interest paid on their mortgages or what they paid in property taxes, on their 2018 federal income tax returns, according to estimates by the Tax Policy Center. That’s down from about 30 percent in previous years.
Families who own a home, in particular, will want to review whether they’d still itemize to lower their tax bill. You’d need deductions to exceed the new higher, standard deduction, which is nearly double from a year ago. And you’ll face new limits relating to the deduction you can take on property and income taxes.
Married couples filing jointly are looking at a standard deduction of $24,000 on their 2018 federal income tax returns – that’s up $11,300 from the old amount of $12,700 on the 2017 tax returns.
Single filers are looking at a standard deduction of $12,000 – up by $5,650 from the old amount of $6,350 on 2017 returns.
But there also is an additional standard deduction for those who are 65 or older, or blind.
A married couple filing jointly, for example, might have a standard deduction as high as $26,600 if both meet the age requirements or both are legally blind.
If married filing jointly, and you or your spouse are 65 or older, you may increase your standard deduction by $1,300. If both of you are 65 or older, the additional standard deduction goes up to $2,600.
If you file under single or head of household and are 65 or older, you may increase your standard deduction by $1,600.
If legally blind, the standard deduction would go up by $1,600 if single or filing head of household.
The extra deduction goes to $2,600 if both you and your spouse are legally blind.
If you are married filing jointly and you or your spouse is blind, you may increase your standard deduction by $1,300.
For someone who is 65 or older and blind, both additional deductions would apply and the standard deduction would be $15,200.
Important point: If you are married filing separately and your spouse itemizes deductions, you may not claim the standard deduction. If one spouse itemizes deductions, the other spouse must itemize.
Will I get any tax break for having children?
Most parents across the country with young children or teens will be able to tap into the child tax credit on their 2018 federal income tax returns – even if they couldn’t use that credit in the past.
“The child tax credit got super-sized,” said Mark Steber, chief tax officer for Jackson Hewitt in Sarasota, Florida.
To claim the credit, the child must be 16 years old or younger, as of Dec. 31, and claimed as a dependent on your tax return. The child also must have a valid Social Security number.
The maximum credit has gone up to $2,000 from $1,000.
Another plus: Now, up to $1,400 per child is available as a refundable credit. Families can claim the credit if they earn income of $2,500 or more in income. As a result, some families can get refunds even if their taxes are $0.
Couldn’t take the credit last year? OK, but new rules apply and more people will be able to take the credit now.
The income threshold jumps all the way to $400,000 for married filing jointly and $200,000 for others before any phase out.
Under the old tax law, the adjusted income limits were far lower: $75,000 for singles; $110,000 if married filing jointly.
The super-sized credit, though, will be needed to offset the loss of personal exemptions for families with children.
“We lost the $4,050 dependent exemption,” Steber said.
In the past, taxpayers could take an exemption deduction for yourself, your spouse and each dependent you can claim. Each personal exemption reduced gross income by $4,050 on 2017 returns. The exemption phased out for higher earners.
A new credit, often called the Credit for Other Dependents, offers $500 for each qualifying child or other dependent relatives, such as older relatives in your household, if they do not qualify for the child tax credit.
For this credit for other dependents, the dependent does not need a valid Social Security number for this credit. An Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number would work.
I’m confused about my property taxes. Am I losing that deduction?
No, but some will face new limits.
If you live in a high-tax state or possibly own both a home and a cottage at the lake, you’re going to want to pay extra attention to one major change on 2018 returns.
We’re looking at a new limit on how much you can deduct when it comes to what you paid in 2018 for state and local taxes.
For 2018 through 2025, the deduction is limited to $10,000 (or $5,000 if married filing separately) for individuals who paid state and local real estate taxes, personal property taxes and income taxes.
“If they haven’t been keeping up with the news, they might be in for a surprise,” Perlman said.
Middle-income and higher-income families who live in states such as California, New York, New Jersey and Illinois may be particularly vulnerable. Generally, states with both high average incomes and higher-than-average state tax burdens would be affected.
But remember, if you paid $12,000 in state and local taxes, you’re still looking at a $10,000 deduction – if you itemize. So you don’t want to entirely write off the possibility of itemizing deductions.
Does the dreaded Alternative Minimum Tax go away?
The AMT isn’t dead, but it’s not the monster threat that it was for so many well-off taxpayers. Many will no longer be subject to the AMT in 2018 and in future years.
The AMT was created in 1969 to ensure that high-income taxpayers paid a minimum amount of tax and didn’t benefit too heavily from deductions.
But over time, more households were caught in the tax mess. Essentially, your tax return is prepared under the regular tax rules. And then the alternative tax disallows many but not all common itemized deductions and other regular tax benefits.
The AMT tax is levied at two rates: 26 percent and 28 percent.
The Tax Cuts and Jobs Act raises the income cap so that fewer people will be affected.
The AMT taxable income exempted from AMT goes up to $109,400 for married filing jointly from $84,500. For single taxpayers, the income exempted goes up to $70,300 from $54,300.
An even more important change was that the new tax act significantly raised the income level at which the AMT exemption begins to phase out. Now the exemption from the AMT begins to phase out at $1 million of AMT taxable income for joint filers, compared with $160,900 on 2017 returns. The phase out is $500,000 now for single filers.
Now, the AMT will affect about 0.4 percent of households with incomes between $200,000 and $500,000 on 2018 returns – down from 27.2 percent on 2017 returns, according to the Urban-Brookings Tax Policy Center’s estimates.
Copyright 2019, USATODAY.com, USA TODAY, Janna Herron and Susan Tompor