Will Your Taxes Increase Under the New Tax Code?

Will Your Taxes Increase Under the New Tax Code?

WITH THE new tax bill passed last year, you may be wondering how the rewritten tax code will change exemptions, credits and individual income tax rates for the 2019 tax-filing season. While there are many factors that can impact whether your taxes will increase under the overhauled tax code, such as your tax bracket, if you typically take advantage of deductions and the size of your family, there are other aspects to consider.

With that in mind, here’s a primer on what’s changed under the new law, and a few clues that hint your tax bill may go up in 2018.

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If you’re considered an average taxpayer, you may pay less. The average taxpayer – that is, someone who has a conventional job and files a W-9 in their taxes, without a lot of property and foreign investments – probably won’t see their taxes rise, according to Mark Luscombe, a principal analyst at Wolters Kluwer Tax & Accounting, based in Chicago. “In general, most individual taxpayers should see at least a modest reduction in federal income taxes this year due to the combination of lower tax rates, increased standard deduction and [an] increased child tax credit,” he says.

Still, because of the loss of personal exemptions and the reduction in deductions that can be itemized, there will be scenarios in which case some taxpayers will see a tax increase, Luscombe adds. “A wealthier couple with two children who had been claiming an itemized deduction of $30,000 for state and local taxes would now be limited to a $10,000 deduction, a loss of $20,000 in deductions,” he explains. “Assuming that the taxpayer is still better off itemizing, they would get no benefit from the increased standard deduction, but would also lose exemptions totaling $16,200. If their taxable income was otherwise $100,000, the loss of $36,200 in deductions at a 24 percent tax rate would cost $8,688 in taxes. While they would get some benefit from the increased Child Tax Credit – $2,000 – they would overall still have higher taxes than under the old law.”

If you have a large family, you may pay more. The new tax code jettisoned personal and dependent exemptions, each of which was expected to be worth $4,150 in 2018. That may benefit some taxpayers, because the standard deductions are larger. In 2017, standard deductions were $6,350 for single people, $12,700 for a joint-filing married couple and $9,350 for heads of households. In 2018, the standard deduction is $12,000 for single taxpayers, $24,000 for married couples and $18,000 for heads of household.

The new rules aren’t as beneficial for larger families. “With respect to the loss of exemptions, a couple with four children would experience a loss of six exemptions – $24,300 – while increasing their standard deduction by only $11,300,” Luscombe says. “If their taxable income had otherwise been $40,000, that $13,000 increase in taxable income would have result in an additional tax of $2,860 at the new 22 percent tax rate. If they only benefit from the refundable portion of the new higher child tax credit, they would be entitled to an additional $400 per child, resulting in a benefit of $1,600, still less than the additional tax from the loss of the exemptions.”

If you’re planning to file for divorce soon, your taxes may go up in the near future. In 2020, tax-filing for 2019 will change dramatically for divorced couples. “Alimony paid for divorces occurring after Dec. 31, 2018, will no longer be deductible. For these new divorces, the paying spouse will not get to deduct the alimony payment, so they [the paying spouse] will be paying both the alimony and the tax on that income they don’t get to keep,” says Michael Law, a certified public accountant at Canopy, a company based out of Lehi, Utah, that produces tax accounting software for accountants.

In the past, the spouse receiving the alimony had to claim the payments as income and pay tax on it. Going forward, in 2019, the spouse receiving the alimony will receive it tax-free. Couples who divorced in 2018 or earlier who have been paying alimony and deducting the payment won’t be impacted by the new law. It only affects those divorcing in 2019, which could make the end of your marriage even more contentious, if you’re splitting up now, Law suggests.

For those contemplating divorce and likely to pay alimony, Law says, from a financial perspective, you should get your divorce finalized before the end of the year to preserve the alimony deduction. “If you are likely to receive the alimony in your pending divorce, you have a significant reason to drag your feet until after the end of the year to make that alimony tax-free,” he adds.

If you currently benefit from standard deductions, your taxes will probably go up. “An example of a filer whose taxes are likely to rise would be a captive insurance sales agent who is paid a salary plus commission and covers most of his or her own business expenses,” says Steven Weil, an enrolled agent and the president and tax manager of RMS Accounting in Fort Lauderdale, Florida. An example of the type of taxpayer who could see their taxes rise is somebody who makes a salary, but also receives a commission and covers most of their business expenses…..Read More>>>

Source:- usnews

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