Preparing and understanding the new tax laws and tax forms will be as difficult as driving through a blizzard. You might be shocked at some of the deductions that are no longer available and understanding the new format of the forms is a slippery slope at best. You might be expecting a larger refund this year due to tax cuts, but you might have already received part of that refund in your weekly paychecks. It is the perfect storm. Add to that the fact that the government shutdown has slowed forms approval by the IRS and yet the threat of another shutdown could cause more confusion and inefficiency.
How did does the Tax Cuts and Jobs Act change the credits and deductions available to you?
Tax deductions lower your taxes by lowering the income you pay taxes on. So, for example, if your income is $42,000 and you take the standard deduction of $12,000 this year, you pay taxes on $30,000.
You have the option of taking the standard deduction. The tax law raised the standard deduction to $12,000 in 2018 for individuals, and $24,000 for married couples.
You can also itemize your deductions. You might choose to itemize if your deductions are worth more than $12,000 for single individuals or 24,000 for married couples. But allowable itemized deductions have changed:
- Mortgage Interest: A mortgage on a first home, second home, a home equity loan or a home equity line of credit (if the loan was used to expand/improve your home), you can deduct interest payments on the loan/loans, up to $750,000. This is down from $1 million in 2017.
- State, and Local Income Taxes and Property Taxes: State and local taxes are still deductible, but only deductible up to $10,000 of state, local and real estate taxes combined.
- Medical Expenses: A deduction for medical expenses (like prescription costs, premiums, etc.) are allowed if those expenses are greater than 7.5 percent of your adjusted gross income. For 2019, you’ll only be able to deduct expenses exceeding 10 percent of your AGI. Your adjusted gross income (AGI) is your taxable income minus any adjustments to income such as deductions, contributions to a traditional IRA and student loan interest.
- Investment Interest Expense: A deduction is allowed for interest you paid on money borrowed to buy taxable investments, up to the amount earned from taxable investments.
- Charitable Giving: A deduction for contributions is allowed defined as “money or property made to qualified organizations...up to 50 percent of your adjusted gross income,” according to the IRS. For cash-only gifts, the tax law increased the limit to 60 percent of AGI.
Other deductions you may have used in previous years were likely eliminated under the law, including alimony payments resulting from a divorce settled after 2018, employee business expenses, investment fees, moving expenses, personal exemptions and tax preparation expenses.