6 years ago, I was preparing more tax returns in a period of 2 months than most people do in a lifetime.
Newsflash: not my most exciting years.
However, I am now down to one each year (my own), and love him or hate him, Trump’s new tax bill is definitely going to affect it.
Is it a beneficial impact? A detrimental one? Only time will tell. But either way, this post is going to break down all the major changes so that you know how it will affect your future tax situation and enable you to make a plan so that you can keep the most $$$ in your pockets.
One item to note: these new rules go into effect in 2018, so the tax return you file this year for 2017 will adhere to the old tax rules. So no need to panic yet.
In 2017, you receive a $4,050 exemption for each filer and dependent listed on your tax return, meaning you get to deduct this amount from your taxable income. For instance, if you and your husband file jointly and claim your two children as dependents, you would have an exemption of $16,200 (4 x $4,050).
In 2018, this personal exemption is completely eliminated.
However, all is not lost – the new increase in the standard deduction may offset this.
The standard deduction is also an amount the government allows you to deduct from your taxable income, and it’s seeing a significant increase in 2018, going from $6,350 for singles in 2017 to $12,000 in 2018 and from $12,700 for married couples in 2017 to $24,000 in 2018.
What does this mean?
Let’s say that you are single and earned $50,000 in both 2017 and 2018. You always take the standard deduction because your itemized deductions (the other option the government allows for items like real estate tax, charitable donations, medical expenses, etc.) are never higher than the standard deduction.
In 2017, your taxable income would be $39,600, as calculated below.
In 2018, your taxable income would be $1,600 less at $38,000.
However, note that the standard deduction only applies to filers, not dependents. So while in 2017, you would get the personal exemption for all 4 of your family members (you, your husband, and your 2 kids) on top of the lower standard deduction, in 2018, you only get the standard deduction for you & your husband. Here’s the difference:
So essentially, the more children you have, the more this impacts your taxes for the worse; however, like all things the government does, it gets more confusing and complex due to a change in the Child Tax Credit.
CHILD TAX CREDIT
The child tax credit is doubling in 2018, going from $1,000 in 2017 to $2,000. Unlike the standard deduction and personal exemption, which are amounts you deduct from your taxable income, the Child Tax Credit is an amount deducted from your tax liability, so it has a bigger impact.
For instance, if you were in the 10% tax bracket, you’d have to get a $10,000 deduction to get the same type of impact as a $1,000 credit. Hence, credits are the power players, ladies. Take as many of them as you can get.
The rate you are taxed at is getting lowered, too, which means savings directly into your pocket…. except for the lowest bracket. They are still getting charged the same 10% as always. The brackets, however, are getting higher thresholds, which means that if you were on the bubble between two brackets in 2017, you’re probably going to be taxed in the lower one in 2018.
Here’s a look at 2017 tax brackets versus 2018.
The healthcare mandate was repealed with the new tax bill, meaning that if you don’t buy health insurance, you won’t be penalized for it anymore.
The question is this: Is this good or bad for our bank accounts?
The proponents for good say that people won’t be required by law to pay a penalty for something they don’t want in the first place. The proponents for bad state that this may cause health insurance costs to spike for those of us who do pay for health insurance.
Again, it’s a game of wait and see, but just be aware that your health insurance costs could be changing within the next couple of years.
BIKE COMMUTING DEDUCTION
For all of you highly frugal (or extremely healthy) individuals out there who bike to work, your $20/month deduction is getting the ax.
For anyone else who dabbles in real estate or owns a small business, this is one of the most exciting parts of the new tax bill: a chance to have 20% of your profits go tax-free.
Any sole proprietor, LLC, or S Corp with business income will get a deduction calculated as the sum of:
- The Lessor of:
- Combined Qualified Business Income
- Calculated as 20% of the income of the business generated, or
- The greater of
- 50% of W-2 wages paid out of the business, or
- 25% of the W-2 wages plus 2.5% of the unadjusted basis immediately following the acquisition of all qualified property
- Or 20% of the excess of taxable income divided by the sum of any net capital gain
- Combined Qualified Business Income
- The Lessor of:
- 20% of the aggregate amount of the qualified cooperative dividends of the taxpayer
- Or taxable income less any net capital gain
That’s hella confusing, even for me. If you want a simple example, click here to get a brief breakdown.
Otherwise, just note this: if you own rental properties or an Etsy shop (or a service-based business earning under the income limits), setting it up as an LLC is a great option.
WHAT’S STAYING THE SAME
STUDENT LOAN INTEREST DEDUCTION
Good news, ladies: you can still deduct your student loan interest in 2018 and going forward. Bullet. Dodged.
If you have an agreement with the university you are attending where they will waive tuition fees if you agree to do research or teach on their behalf, don’t worry: you won’t have to pay taxes on that waived tuition as the original Senate tax bill had intended.
EMPLOYER TUITION ASSISTANCE
In 2017, your employer could contribute up to $5,250 of assistance for you to pursue further education without it being taxed as income. That holds true in 2018 as well (although, again, the original bill had intended for this to be taxed).
HOME $250,000 EXCLUSION
Selling your house? Good news: The $250,000 (single)/$500,000 (married filing jointly) capital gain exclusion is still in existence, meaning any gain the falls into those limits are never taxable.
Remember, this is only applicable on your primary home and you must have lived there at least 2 of the 5 years prior to the sale.
As of now, it appears that the new tax bill will be beneficial on our bank accounts in terms of our tax liability. How it effects our economy and the roots that stem from it is anyone’s guess.
If you have questions or you’d like for me to calculate your estimated taxable income or pass-through deduction based on the new rules, feel free to email me at firstname.lastname@example.org.
 Note: Service businesses with owners making over $157,500 (if filing single) or $317,000 (if married filing jointly) will not be granted the 20% deduction.