With the tax laws changing somewhat drastically this year, you may be wondering how it will affect you. Because your tax return involves so many moving parts, take this as general guidance. For specific questions and planning, contact us directly.
Loss of Exemptions
One of the biggest differences for 2018 will be the increase of the standard deductions and loss of exemptions for personal and dependents you “claimed” in prior years. Starting in 2018, in exchange of exemptions, you will see your standard deduction almost double.
Single Individual will change from $10,400 to $12,000
HOH with 1 child will change from $17,450 to $18,000
Married Filing Joint with 2 children from $28,900 to $24,000
more Credits
The next biggest change will come from doubling the child tax credit from $1,000 to $2,000. This will help families with children under 17. They have also added a non-child dependent tax credit of $500, non-refundable. If your child is off to college this year, make sure that you get their 1098-T form, account activity statement and any receipts for school supplies bought out of pocket. Take a look at our tax organizers for a complete list of what you will need.
Less Itemization
As described earlier, the standard deduction is going up and as a result, many taxpayers will not be able to itemize compared to previous years. In 2017, 25%-30% of households itemized. For 2018, that number is expected to drop to 10% (Source: Forbes.) On average, this won’t affect most taxpayers when taken holistically.
As for other deductions, state and local tax deductions are limited-this will affect high earners in high tax states such as Minnesota where state tax is deductible. The threshold to deduct medical expenses has been decreased, back to 7.5% of adjusted gross income. However, certain other deductions were removed altogether including the ability to deduct union dues.
Qualified Business Income (QBI) Deduction
One of the most exciting changes (if you find tax law exciting) has been the introduction of the Qualified Business Income deduction. While some of the details for this are still being fleshed out, this new deduction will incentivize small businesses that are performing well to hire more employees or pay existing employees more. On the flip side, businesses with a lower net income and those who own rental property will still be be able to shield some of their income from being taxed.
Minnesota - More of the Same
Minnesota has a reputation for being a “high tax” state. While this may be true, it offers several credits to residents whom may be in tough spots financially. We’ve had the Working Family Credit for a number of years, but MN now offers a credit for licensed teachers completing a master’s degree. A special credit is available for taxpayers repaying student loans (both interest and principle!), Veterans may be eligible for a tax benefit (look to our taxpayer resources page for links to credits that you may qualify for) and lastly there’s a new tax benefit for Social Security income.
Post Card size, same Forms
Speaker of the House, Paul Ryan had suggested “doing your taxes on a postcard” as a benefit of the new tax system. While the size of the form 1040 is indeed being shrunk to the size of a postcard, the general consensus of the tax community is that this will simply outsource work to other forms. If all you had was the form 1040 before, the form is smaller now. If you are self-employed, the same forms still apply, this goes for interest from a bank account, sale of stock and rental income, you will still need all the supporting forms filled out. You will also need to have healthcare coverage to avoid a penalty through the end of 2018.