By Brighton Samet, Moneta Tax Planning Consultant
Earlier this year, you may have seen the worrisome headlines about taxpayers getting smaller refunds or taxpayers owing the IRS. Through February 15, the average tax refund was 16.7% lower compared to a year ago1.
Since taxpayers can choose when to file their returns each year, these weekly statistics can vary greatly, especially early in the season. As tax season progressed, statistics showed changes to the average refund to be relatively flat compared to a year ago. As of the most recent statistics through April 19, the average refund decreased by 2.0%, equating to only a $55 drop per refund2.
This is not the story for everyone. These statistics from the IRS do not include the 35 million balance due returns processed. From more than 95 million returns with refunds, the IRS issued $4.4 billion less in refunds compared to a year ago.
Expectations for larger refunds were high following the “Tax Cuts and Jobs Act” in 2017. This is the first tax season that the impact of those major changes will show up on personal income tax returns. The new law is the most significant change to tax legislation since the Tax Reform Act of 1986. Numerous changes were made to the tax code, some that result in tax savings and some that result in tax increases.
Nearly everyone will be impacted by the tax law changes. While the majority of taxpayers will see an overall drop in their income tax liabilities, there are circumstances where individuals will owe more on the same income.
Withholdings and Payments Matter
Remember that your refund or balance due is calculated by the total amount of tax due for the year minus what you paid in via paycheck withholdings and other proactive withholdings or estimated tax payments.
Overall Tax Rates Were Lowered
|2017 Tax Rate Brackets||2018 Tax Rate Brackets|
Standard Deduction Nearly Doubled
|Filing Status||2018 Deduction||2017 Deduction|
|Head of household||$18,000||$9,350|
|Married filing jointly or surviving spouse||$24,000||$12,700|
|Married filing separately (MFS)||$12,000||$6,350|
$10,000 Cap on State and Local Tax Itemized Deductions
The new $10,000 aggregate limit on state and local income taxes, real estate taxes and personal property taxes is the same for single, head of household and married filing jointly filing statuses, but drops to $5,000 for married filing separately. This limitation means you can only include up to $10,000 total for these taxes paid as part of your itemized deductions, no matter how much more you actually paid. For many taxpayers who itemized, this deduction used to make up a large part of their itemized deductions.
Interest Deduction Changes
The law also put new limits on what interest is deductible. Taxpayers may no longer deduct interest on home equity debt, which was debt on the home that could be used for any purpose.
Taxpayers may still deduct interest on mortgage debt that is acquisition debt. Under the new law, the maximum acquisition debt is limited to $750,000 ($375,000 for MFS) for years 2018 to 2025. Existing (grandfathered) debt can still use the $1,000,000 ($500,000 for MFS) prior debt limit.
This will reduce the tax deduction for those who took out home equity loans and did not use the proceeds for acquisition debt, or those who have large mortgages above the limits.
Elimination of Miscellaneous Itemized Deductions
Another major change was to completely disallow miscellaneous itemized deductions like unreimbursed employee business expenses, investment expenses and hobby expenses. Again, fewer deductions mean the total amount of income taxed is higher.
Due to the increased standard deduction and elimination of other deductible items, many taxpayers will no longer itemize deductions.
Dependent Tax Credits More Widely Available
The new law doubled the child tax credit from $1,000 to $2,000 for each qualifying child under the age of 17. There is also a new $500 credit for other dependents who are not qualifying children.
The new law also opened up the tax credit to many more taxpayers than in the past. Joint filers can have nearly quadruple the adjusted gross income ($400,000 instead of $110,000) before the credit begins to be disallowed.
Personal and Dependency Exemptions Suspended
In 2017, there was a $4,050 exemption from income for each taxpayer and dependent listed on the tax return. This deduction resulted in a tax savings at an individual’s marginal tax rate bracket (for example, $4,050 at the 25% marginal tax rate bracket saves $1,012.50 per person on the return) and was especially valuable for larger families. Taxpayers at higher incomes and those paying the alternative minimum tax lost the benefit of the deduction.
The new law has suspended the deduction for years 2018 to 2025. Depending on your circumstances, this may increase the taxes you pay this year.
Qualified Business Income Deduction
This is an especially complicated area of the new tax law, so you may need to consult a tax advisor to determine your eligibility for the deduction. The topline summary includes:
- Beginning in 2018, there is a deduction available of up to 20% of qualified business income from a trade or business within the United States. This is generally “pass-through” business income from partnerships, S Corporations, LLCs and sole proprietorships. It does not include investment income, reasonable compensation from an S Corporation or guaranteed payments from a partnership. The deduction is taken after determining adjusted gross income and is available whether or not you itemize or take the standard deduction. There are several limitations and exclusions to consider here, especially if your taxable income is above $157,500 ($315,000 for joint filers).
- There is also a 20% deduction available for qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income. The deduction on this income is not subject to the limitations for taxpayers with taxable income above $157,500 ($315,000 for joint filers).
Alternative Minimum Tax (AMT)
Congress did not eliminate the unpopular Alternative Minimum Tax as President Trump said his tax plan would do; however, raising the exemption and phase-out levels along with other changes to deductions from 2018 through 2025 should result in significantly fewer taxpayers being subject to the alternative minimum tax.
Planning for 2019
With your 2018 income tax results, you can determine if you should adjust your withholding or make estimated tax payments for 2019 to avoid estimated tax penalties or a large balance due next year.
As always, we recommend consulting with an appropriately credentialed professional before making any financial or tax planning related decision.
© 2019 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.