“The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”
This quote sounds like it could have been shouted last month as Americans were scrambling to finalize their tax filings. In actuality, American actor, cowboy, humorist, and columnist Will Rogers penned it nearly a century ago. The quote has stood the test of time and, perhaps, become even more pertinent now as taxpayers look ahead to the 2019 tax season.
The Tax Cuts and Jobs Act of 2017 is set to have a considerable impact on income tax returns next year. Miguel Farra, chairman of the tax and accounting department for accounting firm MBAF in Miami states, “Overall, everyone should get some type of tax savings.”
The great news regarding 2019 taxes is a raise in the standard deduction.
Single taxpayers were only eligible for a $6,350 standard deduction this year; next year, this amount will nearly double to $12,000 for individuals. Married couples only received a $13,000 standard deduction this year which will get a big boost up to $24,000. Head of household filers will see an $18,000 standard deduction next tax season as opposed to the $9,500 they received this year.
President and founder of Foguth Financial Group in Brighton, Michigan says, “The majority of Americans are going to fall under the standard deduction,” which may save taxpayers time, in addition to money. It may not be necessary for a lot of people to document spending and save receipts because they will most likely not itemize deductions under the new tax law. Director of financial empowerment and financial education coach at BankMobile, a student geared online bank, suggests, “Look at your past taxes. If you’re not close to the new standard deduction, I wouldn’t necessarily waste the time [tracking expenses].”
Changes in the personal tax exemption could come as a shock to many taxpayers.
The sizeable increase of the standard deduction is great news for most households, but, it comes at a cost. Robert Duquette, professor of practice in Lehigh University’s accounting department says, “Taxpayers heard their new standard deductions will double, but they don’t hear about losing their $4,050 personal and dependency exemptions.”
The personal exemption is not considered a deduction, but, it did allow for a $4,500 subtraction from a taxpayer’s personal income for each claimable dependent. There will be an increase in the child tax credit, but, this credit will not benefit families with children attending college. Head of tax for online investment company Betterment, Eric Bronnenkant, states, “Let’s say your children are in college; well, they get a personal exemption and no child tax credit.”
Limitations on state and local tax deductions could prove devastating to residents of some states.
The state and local tax (SALT) deduction will be capped at $10,000 starting in 2018. Those living in California, New York and residents of other high property tax states will take the biggest hit. MBAF’s Farra points out, “That’s huge for the people in South Florida.” Afraid of losing high income taxpayers, a few states are looking for ways to offset the lowered deduction. In an effort to allow taxpayers to bypass the SALT deduction limit, New York is reportedly considering whether a deductible payroll tax could be used as a credit for state income tax. In lieu of paying taxes, California has unveiled legislation allowing residents to make contributions to a state charitable fund.
Caps on the mortgage interest deduction could also unfairly affect residents of New York, California and other high property value states. Next year, the interest deduction on a mortgage will be capped at $750,000, down a quarter million from the $1 million cap this year.
Big changes in home equity loan interest tax deductions will affect many homeowners.
Lehigh’s Duquette says, although people may be aware of the decrease in mortgage interest deductions, they may not have heard about the change to home equity loan interest deductions. He states, “They don’t seem to be aware the home equity line of credit interest [deduction] is completely gone with no grandfathering.” This means, starting next year, people cannot deduct interest, even if they had an existing home equity loan.
There is a some good news for those homeowners considering major home repairs. Foguth says, “Before, it was if you had any interest it was deductible. Now, it has to be connected to home improvement.” The combined total of the home equity loan and the first mortgage cannot top $750,000.
Miscellaneous itemized deductions slated for change or removal will impact many taxpayers in 2018.
Under the new law, many itemized deductions must exceed 2 percent of a person’s adjusted growth income including: tax preparation costs, professional dues, investment fees, and unreimbursed work expenses, just to name a few from a long list of approved items. The unreimbursed qualified employee education expenses and unreimbursed work expenses deductions have been eliminated.
Alimony payments will no longer be deductible on tax returns in 2019. Divorces finalized after December 31, 2018 will no longer have tax deductible alimony payments.
Moving expenses will no longer be tax deductible starting in 2018. The criteria for deducting job relocation moving expenses in 2017 were: the new job location must be more than 50 miles farther from a person’s established home and their previous job and a person must be working full time hours within 12 months after the move to qualify for the moving expense deduction. In 2018, the moving expense deduction has been eliminated for all but members of the military.
Natural disaster related expense tax deductions will tighten. The deduction will not actually change, but, who has access to it will. Floods, wildfires, and hurricanes ravaged many homes in 2017. Families affected by natural disasters could deduct a portion of any losses not covered by insurance or any other relief program from their taxes. In 2018, the law will change to be limited to only those in a presidentially designated disaster zone. These designations are usually made on a county by county basis, which could be devastating to disaster stricken homes not in the right county.
Ultimately, taxpayers will not know how the new tax laws impact their income next year until after signing their tax returns.
It remains to be seen who will be signing a tax return or a check payable to Uncle Sam. To read more about taxes and how they affect investing, please refer to these articles: Have You Ever Wondered how Stocks are Taxed? Here’s the Guide and Tax Tips for Stock Market Investors.