Prior to the Tax Cuts and Jobs Act (TCJA), we had individual income tax rates of 10, 15, 25, 28, 33, 35, and 39.6 percent, depending on your income. There are still seven income-based brackets, but all but two of the applicable rates have been reduced.
Beginning with the 2018 tax year, we’re looking at the following marginal rates:
Keep in mind that the rate cut is just one of a number of changes to the tax code this filing season. When you factor in other goodies, such as a bigger standard deduction and a doubling of the child care credit, the Tax Policy Center estimates that 80 percent of Americans will have lighter tax burden in 2018 (compared with only five percent who will pay more).
That doesn’t necessarily mean you’ll get a bigger refund, though – something a lot of folks are starting to find out the hard way. When the TCJA was passed, employers started withholding less money from your paycheck. So in a weird twist of logic, you could get less back this tax season.
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According to a Government Accountability Office estimate, 4.6 million fewer taxpayers will get a refund check this year. And roughly 4.6 million people will owe Uncle Sam when they didn’t last year. Go figure.
It’s tax season and I don’t want to leave money on the table. What are some of the most important deductions I need to keep in mind when filing my return? — Charles M., Chicago
The fact that fewer Americans will enjoy a refund this year is all the more reason to rack up as many credits and deductions as you can. The last thing you want is to leave money on the table.
There are any number of credits and deductions tucked inside the labyrinthine tax code, but here are some of the most common – and lucrative.
Child tax breaks
Parents won’t want to overlook the child tax credit, especially after it doubled in size with the TCJA. Now, eligible moms and dads can claim a credit of up to $2,000 per child under the age of 17.
Unlike deductions, which reduce your taxable income, credits are a dollar-for-dollar reduction in your tax burden. So, yeah, it makes a big dent.
If you paid someone to watch your child while you worked — and that includes everything from daycare centers to babysitters and day camps — you can also use the child and dependent care credit. It’s worth up to 35 percent of your first $3,000 in qualified expenses for one kid, or $6,000 for two or more children.
The 44 million Americans who are still paying down student loans can at least get some relief from the IRS. They can deduct up to $2,500 of the interest on those loans from their taxable income, as long as they (or a dependent) were enrolled at least half-time in a degree program when the loan was initiated. It’s a so-called “above the line” deduction, too, so you can claim it even if you don’t itemize on your return.
If you recently went back to school or are paying for a child’s higher education, you’ll also want to look into either the American Opportunity Tax Credit or the Lifetime Learning Credit, both of which help offset the cost of tuition and fees. The former provides a tax break of up to $2,500 per student, while the LLC is worth up to $2,000.
Real estate costs
Because of the bigger post-TCJA standard deduction – $24,000 for joint filers and $12,000 for single filers – there won’t be as many of us itemizing deductions for the 2018 tax year.
But there is one group that may still find it beneficial to itemize: homeowners in more expensive real estate markets. If you live in places like San Francisco, New York or Washington, DC, the deductions for state and local taxes (which includes property taxes) and mortgage interest can be pretty hefty.
These two tax breaks aren’t quite as generous as they used to be. The TCJA caps SALT deductions at $10,000, beginning in 2018. And now you can only deduct the interest on up to $750,000 of mortgage debt used to buy or improve your primary or secondary residence (it used to be one million). But some taxpayers will add up these and other deductions and find that it still makes sense to itemize.
The IRS made it a little easier to get some relief for medical expenses in the 2017 and 2018 tax years. You’re allowed to deduct costs that exceeded 7.5 percent of your adjusted gross income (AGI), which is great if you found yourself with exceedingly high hospital or physician bills (is there any other kind?) last year. Starting in 2019, the threshold goes back up to 10 percent of AGI. Here again, you have to itemize on your return in order to claim the deduction.
One of the quirks of the TCJA is that the bigger standard deduction reduces a lot of people’s incentive to contribute toward good causes. But if you’re one of the estimated 18 million Americans who will still itemize this filing season, you’ll want to shave those charitable donations off your taxable income. Some people are choosing to “bunch” multiple years’ worth of gifts into one tax year, so they can get beyond the standard deduction.