This is the biggest overhaul of federal taxation since 1986. Just know that not everyone will benefit in paying less in tax.
Lower tax brackets – Note that you are taxed on a tiered system and not all income is in one tax bracket.
It appears that “tax savings” will be realized by singles with income up to $157,500 but those earning $157,500 to $200,000 actually fall into a higher tax bracket.
Married filing jointly earning up to $315,000 will benefit, up from $233,000 in 2017.
An important factor is that with lower tax brackets, your paycheck withholding also decreased so you are paying less into Federal taxes.
It is important to review your income and withholding now to make sure you are not caught short.
Exemptions – Eliminated. In 2017 you received $4,050 per person on your return. To compensate, the standard deductions were increased. If you don’t itemize, you should come out ahead. As many of you do itemize, you probably won’t.
Let’s say you have a family of 4 and itemized deductions of $20,000, in 2017 you had total deductions of $36,200. In 2018 there are no exemptions and your standard deduction is $24,000. You lose $12,200 of total deductions.
Child Tax Credit – Good news for those with kids under 17. Many people used to phase out of the child tax credit because it disappeared at $150,000 for a couple filing jointly. You lost the $1,000 per child credit. In 2018 you can earn up to $400,000 jointly to get the full $2,000 per child credit.
There also is a $500 “family credit” for other dependents.
Itemized deduction changes – First is the cap on taxes paid. Many people are confused, thinking they can no longer deduct property tax. That isn’t the case. There is just a “cap” of $10,000 on taxes paid which includes income tax paid to the state, sales tax and real estate taxes. Say you make $100,000 per year income and you pay into IL $4,950 in income tax. Your real estate taxes are $6,000. You have a total of $10,950 paid in taxes but you only get credit for $10,000 now.
One of the biggest changes is the elimination of “miscellaneous” deductions which includes unreimbursed employee business expenses. Sales people, tradesmen, nurses, those working from home no longer can write off expenses.
Business Owners -Good News! Corporate tax rates cut – top tax rate was 35% and is now 21%. This triggered the credit for small business owners. If you are a partnership, LLC, S Corp or sole proprietor, you will receive a 20% QBI (qualified business income) credit. This means no Federal tax on 20% of the income from your business.
Another incentive to stimulate purchases is the 100% first year deduction (if you choose) for equipment and software purchases.
What to do next – Schedule a tax review with your tax professional. If you are not working with one or just want a second opinion, we are scheduling complimentary reviews in our Lake in the Hills or Elmhurst office. Feel free to schedule your review by calling (779)220-9608.
Merlak Tax Advisory Group, Inc.
8411 Pyott Rd., Ste. 107
Lake in the Hills, IL 60156
This article is written strictly for informational purposes and does not cover all specific details to each tax law change.
Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to see tax or legal advice from an independent professional.
Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and Carla Merlak/Merlak Tax Advisory Group, Inc. are independent of each other. Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.