2018 Tax Reform and How it Affects Your Finances
One of the most talked about changes of this new reform bill, was the update to income tax brackets and marginal tax rates. But what does that really mean?
Our incomes are all taxed at several different rates depending on how much we each make. Tax brackets and income ranges work together; you know what marginal tax rate you pay, based on the tax brackets.
Tax brackets normally change to account for inflation each year, while marginal tax rates only change when a new tax law is passed – like one was in late 2017.
So, is this a good change or bad change for you? This year, for the vast majority of Americans, tax rates went down – you should be paying less in taxes overall than you did last year.
But what else has changed besides the brackets and rates?
Standard Deduction: You may notice a large increase in the standard deduction when you prepare your income taxes – the new tax law almost doubles the amount. Single taxpayers may see an increase from $6,350 to $12,000, while married couples filing jointly may see an increase from $12,700 to $24,000. This means that fewer people will itemize deductions on their income taxes.
Tax Relief for Families and Individuals: Families with children will also notice some changes. The Child Tax Credit was doubled from $1,000 to $2,000 per child and the amount refundable increased from $1,100 to $1,400. A new, non-refundable credit of $500 for dependents other than children was also added.
Children: The tax rates and brackets for the unearned income of a child are no longer affected by the parents’ tax situation. The new applicable tax rates to a child’s unearned income of more than $2,550 are 24%, 35%, and 37%.
Mortgage Interest: The cap on this deduction has been reduced to the interest on up to $750,000 of mortgage principal on a primary or secondary home. And home equity loan interest can only be used as a deduction if the loan was used to substantially improve your home.
Increase in Alternative Minimum Tax Exemptions: The individual alternative minimum tax was also eased by raising the income exempted for married couples filing jointly from $84,500 to $109,400 and for single taxpayers, it changed from $54,300-- to $70,300. This means that fewer taxpayers will have to pay the dreaded AMT.
Healthcare: The tax penalty for not having health insurance after December 31st, 2018 was eliminated. Out-of-pocket medical expenses exceeding 7.5% of your adjusted gross income can now be deducted.
Consumers Credit Union recommends that you consult your tax advisor regarding questions about tax deductibility and tax law.