How Does the Tax Cuts and Jobs Act Affect You?

How Does the Tax Cuts and Jobs Act Affect You?

Well, that depends.  If you’re like most people, then you noticed a difference from the Tax Cuts and Jobs Act (TCJA) for the first time this past tax season.  Maybe your taxes went down, maybe they went up.  You could have even been part of the 15% of the population who saw no real change.  But that largely depends on your specific tax filing situation.  Individuals, families, and business owners were all affected differently by this sweeping tax reform.  To better understand and control your future impact, we’ll review the TCJA today.

Individuals Under the TCJA

Once the Tax Cuts and Jobs Act went into effect, it was supposed to make things simpler for individuals.  Apart from lowering the effective tax rate for many households, it also increased the standard deduction considerably.  In 2018 alone, the individual deduction jumped to $12,000 and, for married couples, it went up to $24,000.  This means far less people had to itemize on their tax returns this past year.  Plus, it removed the penalty for those without health insurance, also called the Obamacare Tax, starting in 2019.

Unfortunately, the TCJA also limited some important individual deductions such as state income taxes paid and real estate taxes.  Furthermore, all miscellaneous itemized deductions were eliminated, such as unreimbursed employee expenses and investment management fees.  Meaning people who took advantage of these in past years could have paid more taxes in 2018.  While you’re still eligible to itemize, with such a large standard deduction, it’s estimated that 90% of filers chose not to in 2018.  If you’re worried about these limitations, talk to a qualified tax professional now to start planning for 2019.

Tax Changes for Families

In many ways, the Tax Cuts and Jobs Act is designed to benefit families.  Apart from increasing the standard deduction, this reform also doubled the child tax credit.  In previous years, this credit only went up to $1,000, but now it’s up to $2,000 for each qualified child under age 17 you claim.  In many ways, this credit is even more valuable than a deduction or exemption, since it can directly reduce the tax you owe, rather than merely lowering your taxable income.  In addition, depending on your income level, up to $1,400 of this credit can be refunded to you.  Making this the most advantageous of the commonly-used tax credits. 

Beyond this, you still have the child and dependent care tax credits available—the TCJA didn’t change those.  To tap into additional savings, consider the 529 college savings plan(s) expansions.  These help parents accumulate money for future schooling tax-free.  Then, they can later withdraw it for educational expenses, also tax-free.  In the past, it was strictly for college or university costs, but now it can be applied to private elementary and secondary schools with the same benefits.  At least in Maryland and Pennsylvania.  But not all states are so fortunate.  What’s even better is that Maryland residents who contribute to 529 plans can deduct up to $2,500 per beneficiary each year on their state income tax returns!

Better for Businesses

Arguably, those who benefit most from the TCJA are businesses.  This tax reform brought massive cuts to corporate tax rates, as well as additional advantages to pass-through entities, such as partnerships and S corporations, with the new Qualified Business Income deduction. With this new deduction, business owners may deduct up to 20% of their share of the business’s profits from their taxable income.  Sole proprietorships and farms are also eligible for the QBI deduction.

Apart from reducing the corporate tax rate and adding the QBI deduction, the TCJA also increased some other business deductions.  For example, bonus depreciation when from 50% to 100% in 2018.  This list goes on and on.  Ultimately, to take advantage of everything that applies to your business, it’s best to meet with an experienced accountant. 

At Bounds Accounting, we specialize in helping small businesses!  Contact us today for a personal consultation.  We’re happy to answer any questions you may still have about the Tax Cuts and Jobs Act, as well as work with you to plan for the future.