According to a survey conducted by PR Newswire, taxes, a substantial source of anxiety for many, haven’t gotten any easier since the Tax Cuts and Jobs Act. Of those surveyed, 77% reported that they were confused with the new laws.
The results of a second survey conducted by Nerd Wallet showed that 1 in 4 Americans were not aware of the new tax law, and many are missing out on important tax-saving strategies through lack of tax knowledge—something which may have been exacerbated by the new jobs act.
Fortunately, by investing a little time to come to grips with the new law, and its implications on your return, you can put both anxiety and confusion aside. Not only this, but you can also prepare yourself to take action to capitalize on some of the benefits of the tax acts.
What’s more, you are in the perfect place to do all of this, as we are about to review the changes that have taken place under the 2017 jobs act, it’s outcomes, what we can still expect to change, and how you can approach this next tax year to maximize any new benefits and minimize drawbacks.
What Changed with the 2017 Jobs Act
The 2017 Tax Cuts and Jobs Act came into effect on the 1st of January, 2018. The bill brought about a number of significant tax law changes and is deemed to be the biggest tax policy overhaul in 30 years.
Some of the major changes that were brought about include:
- A reduction in the corporate tax rate from 35% to 21%
- A repeal of the corporate alternative minimum tax (AMT)
- A reduction in personal income tax rates
- An expanded exemption level for individual AMT
- A shift in income tax brackets
- A doubling in the standard deduction
- Eradication of some qualifying deductions
- Elimination of personal and dependent exemptions
- Expanded child credit
- A cap on deductible state and local taxes
- A heightening of exemption levels for estate tax
- The eradication of the health insurance penalty (applicable to taxpayers not on health care)
- The introduction of the chained Consumer Price Index for All Urban Consumers (chained-CPIU)
- Expensing of equipment investment
- Deduction for qualifying pass-through organization income
- A transformation of taxation around foreign source income
These changes are in effect until 2025, after which they will expire. The chained-CPIU is the one provision that will continue in effect after this date.
In the meantime, taxpayers will need to ascertain how they can best make use of the new law, and how to avoid unforeseen liabilities.
To do so, let’s first take a look at the policy’s effect on the last tax season.
The Outcome of the Act
Understandably, the wrap up to the 2018 tax year was more challenging than most years thanks to the policy changes.
Uncertainty was rife as individuals, companies and even tax experts bumped up against grey areas and concerns. Because of this, the IRS experienced a record of extension requests as well as a backlog in returns.
According to Market Watch, many people procrastinated over their return thanks to fear of the unknown, and some tax firms saw up to a 20% increase in clients delaying over returns.
Besides these issues, one of the largest problem areas that arose was around withholding taxes. While the tax law had changed significantly, not everyone’s withholding taxes had reflected this during the year.
The upshot of this was that in some instances deductions went down, and in certain cases, taxpayers received no refund, or worse had to pay in.
Additionally, even though the jobs act’s overall directive was to reduce income taxes, after the first post-law change filing season in 2018, some filers who had never had to pay before found themselves liable. These occurrences resulted in public displeasure with the new policy amongst some taxpayers.
In addition, the public sentiment around the policy changes has been highly divided.
According to a survey conducted by Pew Research, a mere third of Americans approved of the new tax law, resulting in the widest partisan gap in views of tax system fairness in over two decades. Released earlier this year, the study also revealed that many people are still as confused about the new tax acts as they were in early 2018.
Additionally, over 60% of survey participants stated strong levels of concern that the new tax law favors corporate interests and high-income brackets, with only 34% feeling that it favors all Americans equally.
Fortunately, whatever your personal stance may be, there is no need to be in the dark about the new stipulations or to feel uncertainty about how they will affect this year’s tax return.
What to Expect in 2019
With the 2018 tax year officially under wraps, it is a savvy move to start considering the current tax year and how you can manage your affairs so as to take advantage of areas of benefit that the new policy provides and minimize areas of potentially increased liability.
Before we do that let us briefly take a look at a further IRS development that is in store for this year.
The IRS Modernization Plan
According to their announcement made on the 18th of April, the Treasury intends to implement a 3-year modernization program within the IRS, that will begin to be implemented during the 2019 tax year.
At its core, the modernization program aims to make use of technologies such as RPA and machine learning and plans to introduce advanced and more automated tax processing systems.
Through these vehicles the IRS intends to:
- Supply superior services to taxpayers
- Make the tax and filing process easier and quicker
- Expand digital channels for taxpayers
- Provide simplified services
- Increase tax enforcement
- Enhanced automatic fraud detection
- Increase cybersecurity
- Increase digitization and reduce paper forms and paper-based processes
- Decrease identity theft cases
The upswing of this is that taxpayers can expect to enjoy a smoother and more efficient tax return process. The IRS also states that with superior systems in place, taxpayers will enjoy a greatly reduced compliance ‘cost’ (ie. the time it takes to compile one’s tax return and complete other processes).
At the same time, enhanced levels of technology may also yield the IRS a higher capability to track down defaulters and spot potential cases of fraud on returns.
Tips for Filing Your 2019 Taxes
Even though analysis states that corporate taxes will be the most widely affected area, the jobs act does have specific and potentially large impacts on individual returns.
Depending on your situation, you may be able to capitalize on some of the law changes, as well a reduce new areas of possible liability.
Here are some key ways in which you can do this.
Revisit Your Withholding Taxes
Depending on your circumstance, one of the first things you might want to do for this new tax year is to revisit your withholding taxes. Your employer will likely (or hopefully) have done this for you, however, it is always best to check. At the same time, analyze whether or not you would like to pay in extra withholding tax in order to either reap a larger refund at the end of the tax year or banish all fear of an unexpected in-payment.
If you are self-employed or are a freelancer, then in your case you might want to increase or make adjustments to your estimated tax payments (which play a similar role to withholding tax).
Take Advantage of the New 401K Cap
The next thing to think about are any areas of potential tax savings that you could take advantage of. One of these is the new 401K cap.
According to the new policy, the threshold for maximum deductible 410K contributions has been increased by $500 from $18 500 to $19 000. This change also applies to IRA accounts.
By maxing out your retirement contribution and taking advantage of the new threshold you not only reduce your tax liability, but you also benefit from an increased level of contributions.
Weigh up Deductions
A number of changes have been made around deductions. In order to maximize the potential of your deductions, it is a good idea to become familiar with these changes.
Firstly, the policy has increased the standard deduction to $12 000 ($24 000 for joint returns), almost doubling it.
The other large change that is now in effect is that the itemized deduction of state and local taxes is now limited to $10 000. This is a drastic change from the previous policy, where many taxpayers claimed large deductions in this area.
Additionally, the jobs act has also limited the deductibility of interest on mortgages. Previously, taxpayers were able to deduct the interest paid on up to $1 million of mortgage principal, plus up to $100 000 of home equity debt. Now, homeowners can only claim the interest paid on up to $750 000 of qualified personal residence financing—which does not include home equity debt.
The next thing to be aware of is that the qualifying out-of-pocket medical expenses threshold that went down from 10% to 7.5% of your AGI (adjusted gross income) does not apply to this tax year, as it expired at the end of the 2018 tax year. For this year it is set to return to its previous threshold of 10%.
If you want to brush up on qualifying medical expenses, you can refer to this list from the IRS.
Lastly, be aware that the new policy has also done away with the following types of deductions:
- Job-related moving expenses (this might still apply for military personnel)
- Unreimbursed employee expenses
- Tax preparation expenses
- Alimony payments
- Casualty and theft losses (except those attributable to a federally declared disaster)
- Employer-subsidized parking and transportation reimbursement
- The ‘general’ category of deductions
Depending on your affairs, the above deduction changes can have a large impact on your tax liability, especially if you previously used to deduct high amounts of state and local taxes.
With the large increase in the standard deduction, it might serve you to consider if it might be more worthwhile than itemized deductions.
Take into Account That Exemptions Have Been Eradicated
Although the standard deduction has doubled, exemptions have been eradicated. Previously taxpayers were eligible for personal and dependent exemptions, however, this no longer applies.
Large families might suffer from this, but child tax credit has doubled, and education tax breaks and college savings have also been adjusted to counter this.
Get Smart with Charitable Giving
If you have utilized charitable giving before to offset income you will be happy to know that with the policy change taxpayers are now able to claim up to 60% of their AGI in qualifying charitable giving deductions.
At the same time, be aware that it might cost you to claim for this deduction. As the deduction for charitable giving is an itemized deduction, if your charitable giving deduction is not substantial (and your other possible itemized deductions are not enough to add up to the new standard deduction of $12 000), then you may be better off not claiming it and opting for the new standard deduction.
If You Are Moving, Consider Tax Free States
If you are relocating, and have flexibility in your choice of future location, it might pay to move to a tax-free state. With the deduction of local and state taxes reduced to $10 000, living in a tax-free state is probably even more financially savvy than it ever has been.
Be Wise About Buying Property
Additionally, whether you are moving or simply investing in property, be sure to take into account the lowered deduction available on property financing interest and the eradication of equity debt interest deductions.
Take Early Action
Whatever your personal position in relation to the new stipulations, one course of action that is bound to be of benefit is early action.
The earlier in the year that you start tailoring your financial decisions the more chance you will have of reaping the most benefit from the new laws and changes.
If you feel at all uncertain of your finances and tax position, particularly post the jobs act, you can always seek assistance. Tax law can be complicated in its application, and the potential of making mistakes and the consequences that can come from that—such as IRS audits— can be very stressful.