The new 2019 tax laws have a number of changes that I really don’t understand. What are the most important ones, and how will they affect how I file my taxes? —Steve K, Boston
President Trump signed the Tax Cuts and Jobs Act (TCJA) more than a year ago. But now is the first time taxpayers have to figure out how the new rules will affect their return. For most people, the net effect will be a little more cash in your pocket this year – about $900 for the typical middle-income earner, according to the Tax Policy Center.
The changes to the IRS code are pretty extensive, but here’s a look at some of the biggest. Keep in mind that most of the provisions expire after 2025, at which point we could have yet another set of rules on our hands.
1. Brand New Tax Rates
Perhaps the most obvious change is the cut to individual tax rates. It gets a little confusing because the TCJA also revised the income ranges for each bracket. But most folks who used to pay a 15 percent rate, for example, are now paying 12 percent marginal rate. And the majority of taxpayers who used to be in the 28 percent bracket will now pay a 24 percent rate. Here’s a chart to help you out:
2. A Larger Standard Deduction
For the 2017 tax year, you could take a standard deduction of $12,700 if you filed a joint return (it was $9,350 for heads of household and $6,350 for single filers). The TCJA nearly doubled those amounts. Now, joint filers can deduct $24,000. Those filing as a head of household can take $18,000 from their taxable income; single filers can take a deduction of $12,000.
As a result, fewer people will have an incentive to itemize their deductions, which should also make preparing the 1040 a less mind-numbing experience. Fingers crossed.
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3. A More Generous Child Tax Credit
Part of the TCJA’s munificence includes a doubled child credit of $2,000 per kid. The refundable amount — what you get if your credits surpass your tax liability — is capped at $1,400.
And this year, a lot more people are able to take advantage of it. For joint filers, the credit started to phase out for joint filers after $110,000 of income; now the cap is $400,000 for couples preparing a joint return (or $200,000 for individuals).
Before getting too excited, realize that the more generous credit is at least partially offset by the end of the personal exemption, which allows $4,050 per-person deduction for yourself, your spouse, and each child in your household. Depending on your tax bracket, you might not be getting a substantially bigger break.
4. A State and Local Tax Cap
While the TCJA threw a lot of goodies at the tax-paying public, it wasn’t quite as kind to homeowners in more expensive parts of the country. Beginning in 2018, the deduction for state and local taxes – including property, income and sales taxes – is capped at $10,000.
On top of that, you can only deduct the interest on mortgage balances up to $750,000. People who took out their home loan prior to 2018 are grandfathered in, so the limit doesn’t apply.
It’s tax season and I’m a new, first-time parent. This is new territory for me and I’d hate to lose out on money for not being aware of the new changes. What are all the tax deductions and credits I, and other new parents, need to know about? — Paul O., Oklahoma City
Having a baby is likely the most expensive decision you’ve ever made, so by all means, take advantage of those sections of the tax code aimed at giving parents relief. Here’s what you need to know.
1. Child tax credit
For a lot of parents, the single most important break is the child tax credit, especially now that it’s doubled in size. Unlike deductions, credits are dollar-for-dollar reductions in your tax bill. So, no, you don’t want to overlook this one.
2. Child and dependent care credit
If you paid someone to take care of your child while you worked – or even looked for work – you may also qualify for the child and dependent care credit. To qualify, your child had to be under 13 years of age at the end of the calendar year. Don’t think the credit is just for parents who use daycare, though. Babysitter fees, preschool tuition and even summer day camp expenses are eligible, as long as you worked while your kid was there.
3. Earned income credit
The earned income credit, or EIC, is another nice perk for parents, although it’s only available to those with low- and moderate-incomes. If you or your spouse was out of work for part of the year or went back to school, it’s certainly worth checking to see if you qualify. It’s a refundable credit, so you can actually get a refund even if your tax liability was zero.
4. Adoption tax credit
As long as you fall below the income limit, parents can also expect some relief if they recently adopted a child. For 2018, the IRS lets parents take a credit of up to $13,810 for a range of expense, including travel expenses, attorney fees and court costs. Given how pricey adoptions can be, you’ll be glad to get at least some of that money back at tax time.
5. Education tax credits
Finally, I’ll mention a couple credits that can help offset the cost of a college education: the American Opportunity Tax Credit and the Lifetime Learning Credit. While the former offers a slightly bigger benefit, it also comes with tighter eligibility requirements. Both credits help defray the cost of tuition, fees and books. And, really, who couldn’t use some help with that?