Taxes. They are on everyone’s mind these days. With 2018 behind us, it’s time to prepare for tax season. Soon most of us will be filing with the IRS. Most people I know are praying they won’t owe too much. That said this leaves many with some lingering thoughts, or concerns rather, about how the new Trump tax plan affect us all (either positively or negatively). General perception sways that more of the population will benefit from the tax plan. To help get a sense of how it impacts you, I’ve decided to write a quick blog to help highlight the two biggest changes.
Change #1: Brackets
The first sweeping change is that income brackets have been modified. The new top tax bracket is 37%. This goes into effect over $600,000 of earned income for joint married filers and $500,000 for individual filers. Below is a quick reference for all the tax rates.
As you can see, just about everyone benefits from a more favorable tax scale. Don’t forget, the US tax code still uses a tiered system. This means that if you make $750,000 this year, your entire income isn’t taxed at 37%. Rather, your first $19,050 is taxed at 10%, then from $19,051 to $77,400 is taxed at 12%, and so on.
Change #2: Deductions
The second big change concerns the adjustments to itemized and standard deductions. This will have a positive impact on some and negative impact on others. For starters, the standard deduction went way up. Married filing jointly can now take a standard deduction of $24,000 (and its $12,000 for single filers). This means if you don’t have a lot of itemized deductions to begin with (think retirees) you’ll be pleased. Moving forward, you can chop $24,000 from your income right off the bat!
There will also be changes to itemized deductions, which are not so beneficial. What you can actually itemize now is much more limited. There is now a cap on how much taxes (real estate and State/local income tax) you can deduct. The new limit is $10,000 combined! For those of you living in states with high income tax or are high income earners, your world is about to change. Previously, there was no limit to what you could deduct for taxes, not the case anymore.
Itemized deductions also had a handful of modifications and eliminations. Remember, this will only be a negative if your itemized deductions are greater than the new standard deduction limits (of $24,000 & $12,000 respectively).
What does this mean to you?
Trying to simplify 2,652 pages of tax code into a two page blog isn’t the easiest of tasks. That said, there are two main focuses for most of us to understand.
1) How the new tax rates trickle down to your income bracket.
2) Where you’ll shake out from an itemized/standard deduction moving forward.
Where do I go from here?
The truth is there are several things you can do. You can download tax software (such as Turbo Tax) and plug-in figures to get a sense of where you’ll land. Another option is you can work with our in-house CPA (or your existing one) to get projections for your 2018 taxes. Or, you can pray to the tax gods that everything will work out fine. Whatever you decide don’t hesitate to give Diversified a ring and we will be happy to assist, even if it means some silent prayers.