What to know before you file
The 2017 tax law is now fully kicking in, and there are some dramatic changes.
Should I still itemize my deductions?
This is the big one for a lot of filers, and for many the answer is no. Each year, taxpayers have to choose between itemizing their deductions—adding up the various individual tax deductions and then subtracting that amount from their adjusted gross income—or taking a standard deduction, essentially a fixed number that you can deduct no questions asked. As of the 2018 tax year, the standard deductions have been nearly doubled, to $24,000 for married couples filing jointly (from $12,700) and $12,000 for single filers (up from $6,350). With the new standard deductions, it is expected that only about 10 percent of tax filers this year will itemize, down from about 30 percent in previous years.
What about state and local taxes?
Some of them are still deductible, but the limits have been greatly reduced. That’s hitting a lot of people hard—and it’s another reason itemizing may not make sense. The new law has capped the “SALT” deduction at $10,000. That particularly affects states such as New York, New Jersey, and California, where income taxes and high property values leave residents with a big state tax bill. A Treasury Department analysis found that the caps will hit about 11 million taxpayers, and about $323 billion in state and local tax payments won’t be deducted on 2018 federal returns. This, as you might expect, has caused some consternation.
Can I still take the personal exemption?
The personal exemption is a specific amount of money that you—and your spouse, and each of your dependent children—can exclude from your taxable income each year. Or could, at any rate; it’s gone now. For the 2017 tax year, the personal exemption was $4,050. For many families (especially those with multiple dependents), the loss of this exemption will likely diminish any benefit they might have received from the higher standard deductions. However, in some ways the tax situation for families has improved.
If I have children, do I get any new tax benefits?
Yes, most likely. The Child Tax Credit is available to filers with dependent kids under age 17. It also applies to other family members under 17—grandchildren, nieces and nephews, even siblings—if you provided more than half of their financial support during the year. Previously, the credit was $1,000 per child. The new tax law raises that amount to $2,000. It also expands the income threshold to qualify for these credits. The Child Tax Credit was originally designed to benefit lower- and middle-income Americans, and previously, you could claim less of the credit once your adjusted gross income passed $110,000 for those married filing jointly. Now that threshold is $400,000 for married couples and $200,000 for individuals.
Are there other changes for kids and parents?
Yes. For years, millions of American parents have used 529 plans to save and invest money for their children’s future college expenses. These funds grow federal tax–free and are not taxed when the money is withdrawn for qualified education expenses. Those include tuition and fees, books and materials, room and board, computers, internet access, special needs equipment, and more. Contributions are usually deductible from state—but not federal—taxes if you invest in your state’s own 529 plan. The good news is that the tax situation around 529 plans has not changed. The even better news is that what you can use them for has. As of last year, you can now use the money in 529 plans to pay for educational expenses at any level, not just college. The new law allows tax-free distributions (of up to $10,000 per year, per beneficiary) to help pay for K-12 tuition expenses at private, public, and religious schools.
Should I expect a bigger refund this year?
Probably not, even if your taxes did go down overall. The nonpartisan Tax Policy Center concluded that the average household’s tax obligations would go down $1,600 under the new tax law, and only about 5 percent of filers would see a tax increase. However, after the tax law took effect, the IRS proactively went ahead and reduced the amount of taxes withheld from Americans’ paychecks. So if you’re getting a tax cut, much of it may already have been in your paycheck. Many earlier filers actually saw smaller refunds, though by the end of February, refunds were running at roughly the same pace as 2017.