Top 6 Things to Know About Tax Reform

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Written by Alice Stevens | Last Updated December 4th, 2019
Alice Stevens is a language enthusiast, loves history, and enjoys traveling. She manages content for BestCompany.com specializing in finance, insurance, and car warranty.

man with dog and three childrenThe changes this tax season are taking some by surprise. A recent study by Freedom Debt Relief found that 80 percent of people in the United States were slightly informed or not informed about the 2018 Tax Reform changes.

Here are a few things that tax experts emphasized:

  • Lower taxes
  • Child Tax Credit changes
  • Changes to the standard deduction
  • State and Local Tax (SALT) deduction changes
  • Self-employed only home office deduction
  • Wrongful levy claims extension

Lower taxes

Michael Law, CPA, Canopy
“The new tax law follows the same seven-bracket structure for individuals as previous law, but the tax rates for many of those brackets decreased, and the income ranges that fall within each bracket changed.
 
For example, the highest individual tax rate is now 37 percent rather than 39.6 percent, and it only applies to taxpayers who make more than half a million.”

Child Tax Credit changes

Logan Allec, CPA and owner of the personal finance site Money Done Right
“While Tax Reform took away the personal exemptions that you would usually get from claiming yourself, your spouse, and your children and other dependents — previously worth a $4,050 reduction in taxable income per person — it beefed up the Child Tax Credit from a maximum of $1,000 to $2,000 and greatly increased the number of people eligible to take the credit.

So while you can't take a $4,050 deduction for your child anymore, you may be able to take an additional $1,000 tax credit for them. There is also a new $500 credit for other dependents.”

Changes to the standard deduction

Riley Adams, licensed CPA, Senior Financial Analyst for a Fortune 500 company, and personal finance blogger for Young and the Invested
“When Congress debated changing the tax code in 2017, the intended spirit was to simplify the tax planning process for the individual taxpayer. The primary instrument for enacting this change was the increase in the standard deduction.

For individuals, the tax reform law made itemizing deductions harder and pushed many more instead to use a larger standard deduction. In theory, the standard deduction under the new tax plan would make far fewer individuals qualify for itemizing deductions and make tax planning simpler.
 
For reference, to itemize your deductions, you must exceed the standard deduction. Therefore, if you raise the standard deduction bar, fewer will qualify to itemize.
 
In 2017, the standard deduction for single filers was $6,350 and $12,700 for married filing jointly taxpayers.
 
In 2018, the standard deduction stood at $12,000 for single filers and $24,000 for married, filing jointly taxpayers.”

State and Local Tax (SALT) deduction changes

Logan Allec, CPA and owner of the personal finance site Money Done Right
“Under the old tax law, homeowners could deduct all of their property taxes on their primary residence.

Tax Reform, however, limited the combined itemized deduction for property taxes plus state and local income taxes to $10,000.

So let's say that in 2017, you paid $8,000 of state income taxes and $6,000 in property taxes on your primary residence. On your 2017 tax return, assuming you itemize your deductions, you could take a $14,000 deduction for these taxes.

Now let's say in 2018, you pay the same amount of state income and property taxes. Rather than a $14,000 deduction, you can only take a $10,000 deduction. The excess $4,000 in taxes you paid is lost.

Taxpayers should keep in mind that this $10,000 limitation does not apply to taxes paid that relate to a business. This being the case, it might be wise for taxpayers whose taxes will exceed the $10,000 threshold to think of ways they can make a portion of their property taxes business expenses. Examples would be renting out a room on Airbnb or starting a home-based business.

So to go back to the example above, let's say that in 2018 you paid $8,000 of state income taxes and $6,000 in property taxes on your primary residence. However, you rented out two-thirds of your house. This means that $4,000 of your property taxes is related to your rental business, and only $2,000 is subject to the $10,000 limitation. This means that you can deduct the full $14,000 of taxes you paid: $10,000 as an itemized deduction and $4,000 as a rental expense.”

Home office deduction for self-employed only

Logan Allec, CPA and owner of the personal finance site Money Done Right
“For tax years before 2018, some employees could write off a portion of their housing costs via the home office expense.

The requirements were that they used a portion of their home "exclusively and regularly" in their employment, that it was the principal place at which they did their jobs, and that their use of this space was for the convenience of their employer.

Tax Reform eliminated this deduction for employees, along with other miscellaneous itemized deductions such as tax preparation fees and unreimbursed employee expenses.

However, the home office deduction remains unscathed for self-employed people.”

Wrongful levy claims

Michael Law, CPA, Canopy
“Individuals and businesses now have two years to file an administrative claim for wrongful levy or seizure as opposed to nine months. If a claim is made during the two-year period, the period for bringing a suit is extended for 12 months from the filing date or six months from the disallowance of the claim. This change applies to levies made after Dec. 22, 2017, or levies made prior to that date if the nine-month period had not expired at that point.
 
Like previous tax law, the two-year time limit for wrongful levy or seizure applies to situations where the IRS has already sold the property it levied. There is still no time limit for filing administrative claims if the IRS has not sold the property.”

For more information on the tax changes and what they may mean for you, view the IRS’s helpful guide to tax reform.

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