How the new tax laws affect your refund next year
If you’re wondering how the new tax laws passed in late 2017 will affect your taxes next year, you’re certainly in good company. The Tax Cuts and Job Act (TCJA), passed on December 22, 2017, is the biggest overhaul of the of U.S. tax code since 1986 and it has many Americans wondering how they can avoid owing money to the government.
Here’s how the new tax laws affect your refund next year:
Some of the highlights for taxpayers include:
- Lower individual tax rates
- Increased standard deduction
- Increased child tax credit
- Elimination of dependent and personal exemptions
- Elimination of some itemized deductions
- $10,000 cap on the deduction for state income taxes, sales, and local taxes and property taxes combined
Withholding the right amount
One of the most pressing questions the new tax law has is how much to withhold from each paycheck. It’s a good practice to take a look your withholding to make sure you’re deducting the correct amount of taxes under the new legislation. Based on wages, marital status and the number of withholding allowances you claim, you may need to tweak your W-4.
“Withholding issues can be complicated and people will need to calculate how much to withhold from their paychecks. The IRS calculator can tell you how many allowances you need to claim on your W-4 so you don’t end up withholding too much or too little,” says Kay Bell tax expert and author of tax blog, Don’t Mess with Taxes.
Bell says that for the most part, the average American will find their taxes are the same or slightly better as lower individual tax rates and new income brackets mean a larger paycheck. The Internal Revenue Service (IRS) released the an updated Withholding Calculator which reflects changes under the new tax law in February.
There are several reasons to check your withholding under the new tax laws:
- Checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year.
- At the same time, with the average refund topping $2,800, you may prefer to have less tax withheld up front and receive more in your paychecks.
Gather your most recent pay stub, along with your 2017 tax return to help you estimate income and other items for 2018. Plug in your numbers into the withholding calculator and it should help you determine if you should give your employer a new W-4 to withhold more from your monthly paycheck.
Weighing homeownership under the new tax laws
The new tax law is also changing a few longstanding tax benefits for homeowners and may weaken incentives for homeownership in expensive markets where home prices are high.
Under the new law, the deduction for state and local property taxes is capped at $10,000 and the maximum amount of mortgage debt you can deduct on your taxes falls to $750,000 from $1 million. Those changes mean that only 14.4% of homes are valuable enough to incentivize their owners to itemize instead of taking the standard deduction.
“The question of whether ownership is worth it will be on the minds of many Americans where property taxes are the highest, since the new federal tax code eliminates some of the incentives of ownership,” says Bell.
Experts say that consumers will still need to weigh the other pros for homeownership — like building wealth through equity and appreciation in value over time — and consider whether owning a home in the same high-property-tax city or county is still the best move.
No more dependent exemption deductions
Raising children will be more expensive for families starting in 2018. That’s because the loss of personal exemptions will hit families with children hard as those households with more than three children will have larger adjusted gross income and end up paying more taxes, which would have been $4,150 each under prior law.
However, an increased child tax credit could offset much of the loss and lower rates. According to H&R Block, the Child Tax Credit may be worth as much as $2,000 per qualifying child depending upon your income. That’s twice as much as before. H&R block lists the criteria for child tax credit on their website.
The effects of the TCJA will touch almost every American, and everyone’s situation is different, so it’s important to research and seek professional tax help if you’re unsure of how the change in tax law will affect you and your family. Tax experts like Kay Bell recommend planning what you can to be fully prepared for the changes to come.
Use the acronym “plan” to help guide you through the latest tax updates.
P stands for “prepare your records ahead of time.”
L stands for “list your issues and questions.”
A stands for “analyze your financial statements for accuracy.”
N stands for “note the changes in laws during the year and discuss them with your tax advisor.”
You can visit IRS.gov to learn more about how the Tax Cuts and Jobs Act will affect you and your refund.