Given all of the changes that the Tax Cuts and Jobs Act (a.k.a. tax reform) has brought with it, you may be left feeling unsure about how tax deductions and tax credits will impact you now. Here are some pointers to help clear up the most common areas of confusion about tax exemptions, deductions and credits:
Personal tax exemptions are eliminated. One of the line items on your return where you are likely to see some of the biggest changes is that related to the personal tax exemption. Up until the 2018 tax year, you could claim a personal exemption of $4,050 for yourself, your spouse and each of your dependents. Under tax reform you cannot claim a personal exemption any longer. However, the new tax laws have introduced a much larger standard deduction which may indeed offset this loss for many taxpayers.
Standard deductions are increased. There is now a standard deduction of $12,000 per individual taxpayer ($24,000 for married taxpayers who file jointly). This is notably larger than both the previous standard deduction of $6,350 per individual or $12,700 for married taxpayers who filing jointly and the now defunct personal exemption. Where the confusion may come in is when you try to decide if you should take this standard deduction or itemize your deductions.
While experts estimate that less than half of all American taxpayers itemize their taxes, for some people it is an important way to lower their tax obligations. This may be especially true if you are a business owner who has significant expenses to deduct. If your eligible deductions exceed the new standard deduction, then it may pay for you to itemize. If they don’t, you are likely best off just sticking with the standard deduction.
Keep in mind, however, tax reform has eliminated or reduced several long-standing tax deductions such as those for moving expenses, alimony payments, state and local taxes, as well as mortgage and home equity loan interest. Be sure to factor the changes to these and other deductions into your calculations.
Changes to dependent tax credits. In most cases, the qualifying rules for dependents remain the same as they were before the TCJA. If you are claiming dependents on your tax return there are some important updates to tax credits under tax reform that you should note:
1.As part of the American Taxpayer Relief Act (ATRA) in 2012, the Child Tax Credit, which reduced parents’ tax burden, was made permanent. Under the new tax law this tax credit has increased from $1,000 to $2,000 per qualifying child depending on a parent’s taxable income.
Tax reform has also increased the income threshold for the phase out of this credit to $400,000 for couples and $200,000 for singles. This is a big increase when compared with the 2017 tax year amounts of $110,000 for couples and $75,000 for singles. As such, even if you didn’t qualify for the Child Tax Credit in prior years because your income was too high, you may now find that you do. The credit cannot be taken for more than the amount of tax you owe to the IRS.
2.If you are not able to use the full Child Tax Credit because it is more than the tax you owe, you may be able to use the Additional Child Tax Credit. In this case, you may be eligible to claim this credit, allowing you to receive a payment (i.e. a tax refund) for the unused portion of your Child Tax Credit. Under the new law, the Additional Child Tax Credit increased from $1,000 to $1,400. However, if you are able to claim the full amount of the Child Tax Credit, you will not be eligible to claim this credit as well.
3.Tax reform has also introduced a $500 dependent credit which can benefit taxpayers who support dependents such as qualifying children (those over 17 attending college) or qualifying relatives, such as an elderly parent.
With all of the changes tax reform brings to exemptions, deductions, credits and other areas, you may find that completing this year’s return may be a little more challenging than previous years. Contact our New York City tax office for assistance.