Taxes in Perspective

By Chris Daunhauer

Most taxpayers will find that the tax return they sign and submit for tax year 2018 (the one that’s due by April 15, 2019) will be significantly different than the one they filed for tax year 2017.  And this will be true even if their income and expenses didn’t change much in 2018.

That’s because 2018 was the first year impacted by the recent sweeping changes to the tax code enacted in late 2017 by the Tax Cuts and Jobs Act.  The new tax code is simpler in some ways and more complex in others.

Here’s some changes you may see before you sign; these are the ones that will impact almost all taxpayers…

Personal exemptions are no more.  The $4,050 per person exemption that you claimed for yourself, your spouse, and each of your dependents has been removed from the code.

The standard deduction (the one you get in lieu of itemizing) has been set much higher.  For married filing joint taxpayers, it’s been increased from $13,000 all the way up to $24,000.  For singles and married filing separately, it’s been increased from $6,500 to $12,000.  And for heads of households, the change is from $9,550 to $18,000. Under these new, higher standard deductions, more taxpayers will choose to forego itemizing.  Charitable contributions, mortgage interest paid, and state and local taxes will still be deductible under the new tax code, but fewer and fewer taxpayers will have enough of these to warrant itemizing.  More and more taxpayers will just take the standard deduction.  As a result, you may discover that the charitable giving you did in 2018, and/or the property taxes and sales taxes you paid did not save you any money on federal taxes.  Also, if you’ve been holding on to a home mortgage in part because the interest you pay to your lender is subsidized by other taxpayers, that may no longer be the case.

As you might expect, the tax brackets themselves have been tweaked.  We still have seven brackets as before, but the tax rates (percentages) assigned to each bracket and the amounts of taxable income that each bracket applies to have changed a bit.

2018 has ended, and with it most opportunities to make changes that will reduce the amount you pay for 2018 (or increase your refund).  Most, but not all.  If you haven’t filed your return for 2018 yet, you can still make an IRA contribution for 2018.  And (if you have a high deductible health insurance plan) you can still make a contribution to a Health Savings Account.  This is true until the day you file your taxes, or April 15, 2019, whichever comes first.  These last two are “above the line” deductions and they are especially valuable because they are in addition to your standard deduction.

It takes thoughtful planning to reduce the amount of taxes you pay from being strategic about income and capital gains.  You may find that reducing the amount of your income being taxed is easier than increasing your income.  It’s not about what you earn, it’s about what you keep!