Tax season is upon us, and with it comes the task of working through the newly reformed tax code. This can be a little confusing, not only because of the complicated nature of the U.S. tax code but also because of the constant soundbites from all facets of the news media, giving seemingly incongruent information on new changes to the code. While it would be impossible to decode every change to the code, and how it will affect each person’s unique situation, here are some highlights from the current tax reform bill, and how it might affect your filing and return.
Changing Tax Brackets
One of the largest changes to the tax code is the redistribution of tax brackets. The original intent was to simplify the tax code down to 5 tax brackets, but the current code keeps the customary 7 brackets. It does, however, lower the marginal tax rate for each bracket, (the percentage of income which you pay to the government), at the expense of also lowering the minimum annual income for each bracket. In short, most taxpayers will pay roughly 2% less than the previous tax law would have dictated, but you will want to check and see if your tax bracket has changed. You can check the current income thresholds for each bracket at forbes.com or the IRS website, irs.gov.
Changes in the Standard Deduction and Personal Exemption
While some politicians have touted the idea that many Americans will be able to take “double” the standard deduction, which is true but might not be the whole story when it comes to your return. However, most Americans will benefit from the new code overall. Changes to the code allow everyone to begin with a Standard Deduction of $12,000, up from $6,500 in the former code. The tradeoff is that the IRS has done away with the Personal Exemption, which could allow filers to deduct $4,150 in addition to the Standard Deduction. Taxpayers still come out on top, as the deduction and exemption only totaled $10,650 previously.
Child Tax Credit
For those filing with children under 17 there is good news, even though that personal exemption has been removed. Those taking advantage of the Child Tax Credit will be able to take a $2,000 deduction, which is double the previous amount of $1,000. Also, if you’re lucky enough to be looking at a return this year, $1,400 of that deduction is refundable this year! The household income threshold has also been raised for this credit, now sitting at $400,000 for those who are married and filing jointly, ($200,000 for individuals).
HSA Limits Lowered
With many changes in healthcare proposed and debated this year, HSAs have been a hot topic of conversation and surprisingly, due to their championing by the current administration, the amount that may be deducted for these plans has decreased. However, this deduction has only been decreased by $50, (from $6,900 to $6,850) for family plans. Individual plans have not been impacted, with the deduction for these plans remaining at $3,450. It is also important to remember that this deduction applies to “high deductible plans”, which the IRS defines as a plan with a deductible higher than $1,350 for individual coverage and $2,700 for family plans, and annual expenses to exceeding $6,650 for individuals and $13,300 for families.