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Tax Time: Here’s What You Need to Know
Filing this year (for 2018 taxes) is bringing with it changes to the tax code. As you prepare for tax time, here’s what you need to know.
Open for business: The IRS opened up e-filing last week so you can begin filing your 2018 taxes. The sooner, the better. You can greatly reduce your chances of being victimized by tax fraud by filing early. Thieves use stolen information to file fraudulent tax returns, pocketing any returns before the real individual files.
Get all your docs in a row: If you don’t have all your tax documents already, you should be receiving them within a week, as businesses were required to get them on their way to you by January 31st. If you don’t receive them soon, look into it right away. It may be a simple error or oversight but you want to track down those sensitive docs. You may also discover that you’re able to obtain secure digital copies. You should still receive paper copies but this may eliminate the need to wait for it to be sorted out before you file your taxes.
Standard deductions increased for all:
Single filers: This year (2018) = $12,000 versus Last Year (2017) = $6,350
Married, filing jointly: This year (2018) = $24,000 versus Last Year (2017) = $12,700
Married, filing separately: This year (2018) = $12,000 versus Last Year (2017) = $6,350
Head of Household: This year (2018) = $18,000 versus Last Year (2017) = $9,350
Taking the standard deduction is now likely better for most filers, over itemizing deductions.
Personal exemptions went away:
This means that previously (in 2017), in addition to the standard deduction, each person listed as a dependent was a further deduction of $4,050 per person. So, for example, a couple filing together, with one child, received an additional deduction in their tax liability of $12,150 for 3 people. If added to the previous standard deduction, they could deduct $24,850 from their taxable income. Which, unfortunately, is a deduction loss of $850 with the new rules.
However, it’s important to note that tax deductions are only reductions in the total amount of income you’re taxed on. Taking our example once more, in 2018, a couple making $75,000 jointly would be moved down to being taxed on $51,000, whereas in 2017, it would have been $50,150. Not a large change.
Tax brackets shifted:
Even though personal exceptions went away, the shift in tax brackets is where most households will really see a noticeable difference. Tax brackets are the percentage you’re taxed, based on the income you earn. For 2018, earners will be able to earn slightly more while still staying in the same tax bracket. This is good news. But the rare change in the marginal tax brackets is where it really lowers tax liability.
What are marginal tax brackets and how do they work? Unless you do not make more than the lowest income threshold (where you’re taxed at 10%), all taxpayers are taxed on portions of their income. This means that you are not taxed at one flat rate on the full amount of your taxable income. Let me explain using a couple with a taxable income of $75,000. For 2018, they would be taxed at 10% on the taxable portion of their income ranging from $0-$19,050. Then, their remaining income, $19,051-$75,000, would be taxed at 12%. This is a significant reduction from that same scenario in 2017, where that couple would have been taxed on their taxable income at 10% for $0-$18,650 and then at 15% for $18,651-$75,000. Using just straight numbers, this is a reduction in owed taxes of nearly $1700.
Furthermore, the new brackets removed the “marriage penalty” that used to occur against joint filers. Income brackets are now simply doubled for married filers, whereas previously, filing separately was sometimes a tax advantage.
The Child Tax Credit doubled:
Even though parents are losing the personal exemptions for each child, this change will help make up for it. Starting for 2018 taxes, filers with dependent children under the age of 17 will receive a $2000 tax credit per child, double the $1000 it was in 2017.
Why does this make such a huge difference? This is a tax credit, not a tax deduction. A tax deduction only reduces the amount of your taxable income. A tax credit, on the other hand, reduces the actual amount of tax you owe. To put this simply, if a couple with two children owed $5,250 in taxes, once the Child Tax Credit for 2018 is applied, they would owe just $1,250 in taxes. Now that’s tax time relief!
As always, I highly recommend getting professional assistance with your taxes. With the new tax code in place, most people should see a reduction in owed taxes and I want you to get every penny back that’s yours!
More good tax tips you'll want to know: