A few notes about 2018 taxes:
1) There seems to be a lot of consternation over a decrease in tax refunds. I get how it seems great to get a huge refund in February – however all that really means is that you gave too much money to the government throughout the year. So if your refund is smaller it is likely due to the increase in your regular check and/or due to your increase in pay. I do a lot of people’s taxes and everyone paid less in total taxes than they would have paid for the same income in 2017. The withholding tables changed a year ago to more closely align to what you would actually need to pay which in my book is a good thing, but would cause your refund to be smaller. If you love having a huge refund just have your employer withhold extra from your check by changing your W4. You could call it the government sponsored interest-free savings program. (And who doesn’t like free things?)
2) If you have a decrease in your refund it is for 90% of you not because your taxes have increased. Unless you live in a state that has high state income taxes that are no longer deductible, you received a tax break in 2018. For the middle class here are the main benefits of the tax reform.
a) Your tax rate on your taxable income was decreased by roughly 3%.
b) Your standard deduction nearly doubled (for all filing statuses) from $12,400 to $24,000 (Married). This change has the added benefit of making it unnecessary for most Americans to need to itemize thus simplifying your 1040. A standard deduction reduces your taxable income.
c) You lost your exemptions for each member of your family. Prior to tax reform you received an additional $4050 deduction per person in your family. So for a married couple with no children who did not itemize this means your effective standard deduction was $20,500 in 2017 and is now $24,000. So $3,500 less taxable and the 3% reduction in tax rate is the net gain to you. If you previously itemized and your itemizations were between $15,900 – $24,000 you will have more taxable income in 2018. This will largely be offset by the 3% reduction in your rate – though the closer you are to $24,000 in itemizations the less benefit the tax reform will give you. If your itemizations are above $24,000 you will benefit on the amount above just as before with the major exception of state income tax deduction is limited to $10,000.
d) Another significant change was made to the child tax credit. For those with children this credit doubled from $1,000 to $2,000 per child under the age of 17 in 2018. A credit is much better than a deduction because it comes off what you owe. So this credit is better than the previous tax code where you received an exemption of $4,050 and a credit of $1000 per child. The income limit at which you can take the child tax credit was raised significantly from $75,000 to $200,000 and from $110,000 to $400,000 for single and married respectively. Additionally up to $1,400 is refundable even if you don’t owe taxes.
e) Finally a dependent credit of $500 was added for people living in your household above the age of 17 who are dependent on your income – this can be a child or other family member for which you are caring. This is a new credit that did not previously exist.
Bottom line for most people especially in the middle class, tax reform will result in a moderate reduction in your taxes paid in 2018 vs 2017.
Lastly – if you do not have complex income taxes (like a business or self-employed) please do not go pay a ton of money at HR block to get your taxes done. You really can do it yourself – the tax code is as simple as it has ever been. If you choose to ignore this advice please do not pay extra to get your refund early on a debit card – it is just a complete waste of money.
I would be happy to help you do your taxes if you are stuck. I actually enjoy doing taxes.
Also I have a very effective tax calculator that I can send you if have excel that can help you calculate 2018 taxes and help you look at what you need to withhold for 2019. If you are interested message me and I can email it to you.
So enjoy the tax season – it’s a rush! 😀