How Will the Tax Cuts and Jobs Act
(Also known as 2018 Tax Reform) Affect Me?
Every time the government “reforms” a system, new rules and conventions must be adhered to, and until the new system is actually functioning for several years, confusion and fear of the unknown are commonplace.
The new tax reform, signed into law late December 2017, has been called a Tax Cut, but is that accurate? The answer is yes and no---of course tax reform is never simple. Most individuals will see tax cuts, due to increased standard deduction and lower tax rates. However, many middle class individuals, particularly in high tax burden states (NJ being a prime example) will wind up paying more tax.
I have included some FAQs to address common concerns:
1. Will my paycheck change? The IRS announced changes in withholding on Jan 11, 2018. Employers have until February 15th, 2018 to start using the new withholding rates. Some employers have already implemented them in January. These changes are designed to reflect the lower tax rates, so that individuals will see the tax reduction in their paychecks during the year, instead of having to wait for an increased refund in 2018. See the IRS notice here: IRS Withholding Changes
2. When will these changes go into affect? Will they affect 2017 tax returns which need to be filed in 2018? Most of the changes will affect tax year 2018 and beyond. The Obamacare penalties for no insurance have NOT been changed. For tax year 2017—a significant change will take effect. The threshold for deducting medical expenses on your federal change will return to 7.5% instead of 10% of adjusted gross income. This change will not affect the majority of taxpayers as most taxpayers do not have enough medical expenses to deduct on their federal returns at the 7.5 or 10% threshold.
3. Will I pay more tax or less? This is a difficult question to answer as it depends on your individual income and tax situation. In general, taxpayers who take the standard deduction will see a reduction in federal tax. Whether or not this affects your refund/balance due at tax time will depend on the withholding changes that are made (see FAQ#1)
A. Persons who use the standard deduction (do not own a home, or have less itemized deductions that the standard) Will most likely pay less taxes, because the standard deduction is now almost doubled, and overall tax rates on income are reduced.
B.Persons who itemize and pay high state and property taxes (very common in NJ) may actually pay more in taxes, because even though the standard deduction is virtually doubling, your increased standard deduction may be lower than the total itemized deductions you have been taking up to now—AND—the cap on deducting state income and property taxes is now $10,000—which is less than many people in NJ pay.
4. How do I figure this out and plan? Currently, there are many different tax estimator calculators on the internet, but all of them have shortcomings, and are only good for an estimate—not an actual determination of your expected tax liability for 2018. The best way to know the score is to discuss your situation with your tax preparer when your 2017 tax return is prepared. A good preparer can compare your 2017 tax liability with your expected 2018 tax liability side by side, and help you to plan and prepare for the future. Here is a link to an article which includes some current tax reform calculators: http://www.nj.com/politics/index.ssf/2017/12/want_to_know_how_you_will_fare_under_trump_tax_pla.html
5.What are the specifics of 2018 tax reform? Changes are too numerous to list on this page, but if you would like to read more and get background information on the new tax plan, please see the links below: