The New Tax Law and How It'll Affect Taxpayers in 2019

Estimated reading time: 5 minutes

The tax return due date of April 15^th 2019 is around the corner and many are wondering how it affects their tax return.

The application of changes to the tax law took effect for the tax year 2018.  For many, they will not personally see the effects until they file their taxes in 2019.  For some there may be a dramatic benefit and for some the result to the changes may not be as dramatic. 

Let's address some common questions by people who are trying to decipher how the changes will affect them.

Q: 5 out of 7 tax rates have changed. How have the tax rates and/or brackets changed and how can it affect tax payers?

A: Generally, individuals will see a reduction on taxation at almost all levels of the marginal tax rates. Below is a comparison chart that shows a comparison between the 2017 and 2018 tax rates.  Generally, for all Americans, there is a reduction to the tax rates beginning on the 15% tax bracket. 

Q: I heard married couples filing jointly are greatly affected, is this true?

A: Under the new tax law, personal exemption which amounts to $4,050 per dependent (e.g., a family of 2 adults and 2 children =$16,200) is not available to reduce a taxpayer’s taxable income for tax years 2018-2025.  This is quite a substantial amount of taxable income reduction. 

On the other hand, the standard deduction for married couples filing a joint tax return was almost doubled, from $12,700 for 2017 to $24,000 in 2018.  For couples who do not have enough expenses to itemize their deductions, this is a great gift for 2018.  This increase in the standard deduction gives a substantial reduction of taxable income and coupled with the reduced tax rates, will give a substantial tax reduction to couples.

Q: Has the standard deduction increased or decreased? How will this affect households?

A: The standard deductions have increased.  The amounts have been almost doubled.  The chart below depicts a comparison of the increase from 2017 to 2018.

Standard deductions reduce the Adjusted Gross Income (AGI) of an individual to determine the taxable income.  With the amounts doubling, this will reduce the tax payer’s taxable income significantly for those who do not itemize their deductions.

Q: Have there been any changes in itemized deductions, including for medical expenses, charitable distributions, or more?

A: There were three significant changes to the itemized deductions: 

• SALT- The deductions for state tax and local taxes SALT has been capped to $10,000 and $5,000 for separate return filers. This means that in states where tax payers customarily used to be able to deduct an unlimited amount of state and local taxes including property taxes, filers will not be able to deduct amounts above $10,000 from their tax return.
• Medical Expenses- Prior to 2018, amounts of medical expenses could not be deducted for expenses that are within 10% of a tax payer’s AGI. This percentage has been lowered back to 7.5% of the taxpayer’s AGI.
• Charitable Contributions- The tax deductions allowed for charitable contributions had a maximum of 50% of an individual’s AGI. This percentage has been increased to 60% beginning tax year 2018.

Q: How much has the child tax increased, and how will it affect households?

A: Prior to 2018, the child tax credit for every eligible child (under age 17 during the tax year) was $1,000.  The $1,000 reduces the tax liability of the taxpayer by the amount of the tax credit. The credit of $1,000 could also be refunded if the tax payer had at least $3,000 of earned income and phased out as incomes increase.  For 2018, the credit has been increased to $2,000 per eligible child.  Up to 1,400 can be refunded if the tax payer has earned income of a much lower threshold of $2,500.

Q: Are tax credits better than tax deductions?

A: Tax deductions lower the amount of income that will be subject to tax.  Tax credits lower the amount of the tax owed.

Q: What is personal exemption and dependent deduction? Is this still relevant?

A: Since the standard deduction have been almost doubled, the personal exemption has been eliminated until tax year 2026. This may have a significant effect on tax payers that have a number of dependents.

Q: What is the status of the corporate rate?

A: The corporate rate was simplified to a straight 21% after deductions. 

Q: Are there any changes to tax-deferred retirement accounts?

A: No changes

Q: What is the largest takeaway regarding the new tax laws?

A: There are significant tax reductions for most Americans both individuals and businesses.

Q: What can tax payers do to make sure they are on track with their taxes for 2018?

A: Consult with their tax advisors to make sure they maximize all their potential tax deductions and reductions.