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 withholding on paychecks changed in January or February in 2018. Withholding has changed slightly again in January of 2019. 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. It is always a good idea to have your tax preparer do an estimate for you for the next tax year, so you can adjust your withholding as soon as possible. YOU as the employee have the power and responsiblity to adjust your own withholding.
2. When will the 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 years 2017 and 2018—However there will be no penalty for not having insurance after tax year 2018.
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.
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. If I don't itemize anymore, can I just do my taxes myself? Sure, you can always try your hand at doing your own taxes no matter what your situation is. However, there is always peace of mind when you use a qualified professional who can help you file, plan, troubleshoot; a business you can access all year long that charges reasonable prices--for example, Prosperity Tax Service!!!
5. Are employee business expenses still deductible? Unfortunately no. This is one of the negatives to the tax reform. Uniforms, employee related educational expenses, employee travel expenses etc. are no longer deductible under the new rules.
6. What if I am self-employed or have a side business? There is a new 20% "Pass thru deduction" on self-employment income if your adjusted gross income does not exceed certain limits. This is a plus to persons of moderate income who are self-employed or have side businesses, or pass through income from partnerships or S-corps. The deduction only applies to income tax (not self-employment tax) but it is still a valuable deduction.