02 Jan 3 Tax Reform Changes That Affect Your Tax Household Now
Have you heard the phrase “it would take an act of Congress” to get something changed? Well, Congress acted in December 2017 and passed the Tax Cuts and Jobs Act. Most taxpayers such as individuals and businesses are affected by this legislation. Below are three tax law changes that impact taxpayers who file Form 1040, U.S. Individual Income Tax Return:
New income tax brackets. Due to the fluctuation of prices, each dollar buys less and less of goods and services or vice versa. Prices increase regularly; therefore, Congress tries to lessen the impact by expanding the taxable income levels within a tax rate group. This change, generally, has resulted in more taxable income included within the lower tax rates. Note, there are 7 tax rates – 10%, 12%, 22%, 24%, 32%, 35% and 37%. Visit the IRS’s official website for the federal income tax levels (brackets).
No personal exemptions. Formerly, taxpayers were allowed a specified amount of income to exclude from taxable income based upon the number of qualified individuals in their tax household. The deductions were known as personal and dependency exemptions. These tax benefit have been suspended from 2018-2025. It will take another act of Congress to reinstate these once popular deductions.
Increased standard deduction. Before you review the 2018 basic standard deduction amounts, you need to determine your filing status – single, married filing jointly, married filing separately, head of household or qualifying surviving spouse. Generally, the basic standard deduction amounts have increased approximately by 45% compared to previous years. Review, the basic standard deductions amounts and additional standard deduction for the elderly and blind on the IRS’s official website.
You may ask, “what is the intent of these changes?” We know that taxation is a means to raise revenue to pay for the United States of America’s bills. More than likely, this goal will not change for a long time. If you review the new 2018 Form 1040, you will see that there are 23 lines. That is 56 less lines than the 2017 Form 1040. For millions of taxpayers, their voluntary tax compliance has become easier; but, many taxpayers with complex tax situations may need to file new Form 1040 Schedules.
Further, taxpayers are encouraged to review their payroll withholdings and/or estimated tax calculations regularly. Often, this assessment involves life events that may have a tax impact, using the IRS’s Withholding Calculator and updating your Form W-4, Employee’s Withholding Allowance Certificate. Three key take-aways are determine your correct filing status, establish checks and balances that result in you paying only the taxes you owe and consider the effect of inflation in your financial transactions. Best wishes!