As most of us know, there have been drastic changes to the income tax system taking effect this year, thanks to the Tax Cuts and Jobs Act, otherwise known as the Republican tax reform.
This is the first in a series of special articles to guide you through the most important changes, and show you where you may be able to maximize your refund or save money on your tax payments this year.
Did you know that the federal tax code is 6600 pages long? Or that there is another 70,000 pages and growing of case law around it, interpreting, expanding and attempting to clarify these rules? And despite being an attempt to simplify tax law, this year’s legislation is likely to lengthen the code even further, rather than making it less, well, taxing.
And while it was framed as a tax cut, it’s more of a redistribution of taxes, changing who pays what, but having a minimal impact on most Americans in its final form. However, one of the widest reaching changes is a reorganization of how deductions work.
For many taxpayers, counting and itemizing deductions used to be one of the most labor intensive parts of filing taxes. From medical bills to gambling losses, mortgage interest to farm implement purchases, the list of deductions stretched on, with the most popular tax preparation software asking for details on nearly a hundred kinds of expenses and losses.
While most of these have gone away, especially infrequently declared and minor ones, the standard deduction increases substantially beginning this tax year. For a single taxpayer, this amount increases from $6250 to $12000, greatly reducing the likelihood of itemizing deductions (even before the deduction reduction, the average deducted by those who did choose to itemize was $9400 per person) and providing a slight boost to paychecks from reducing withholdings.
Some of the deductions allowed to remain:
- Charitable Contributions
- Mortgage interest, on the first $0.75 million of the loan
- Medical bills exceeding 7.5% of earned income
- Graduate student tuition waivers
- Student loan interest
- Up to $10,000 of state and local taxes, including income and property tax
However, these are going away:
- The Personal Exemption, which used to be an automatic deduction of $4100
- Interest on home equity lines of credit
- The cost of tax preparation itself
- Losses due to theft or fire
- Gambling losses
- Unreimbursed employee expenses (unless filing as a contractor or self employed)
As always, if you have any questions about your personal tax preparation, asking a professional is the best option. Even if you prepare your own taxes, a consultation with an accountant or financial planner can help you minimize your unnecessary tax burden!