What Every Family Needs to Know About the Tax Plan for the 2019 Tax Season
The Trump tax cut turns one—and you're about to get your first return ready under the new law. Here's what you need to know.
The Tax Cuts and Jobs Act promised tax cuts for the middle class and for corporations to help bring jobs back to the U.S. But did they deliver? Here's the scoop on what happened in the first year since the tax cuts happened, and what you can expect in your first return.
The Good News
The standard deduction has nearly doubled. The standard deduction will go up under the new plan, to $12,000 for individuals, or $24,000 for married couples. The bill's authors hope this increased standard deduction will actually decrease the number of people who need to itemize deductions.
They created a new "family credit." The new tax plan increases the child tax credit to $1,600 per child, from the current $1,000. The plan also lets more people claim the child tax credit—the new bill would allow couples who make up to $230,000 to claim it. They also created a $300 credit for each parent or nonchild dependent—you can claim that $300 credit for an elderly family member you're caring for, or for an over 18 son/daughter who is still reliant on you.
They created fewer tax brackets. Our current system has seven tax brackets, which the new plan would reduce to five: 0 percent, 12 percent, 25 percent, 35 percent, and 39.6 percent. But reducing the tax brackets has left some pockets where people may be paying an increased tax rate. For instance, families who make more than $260,000 but less than $416,500, who would have been billed at a 33 percent rate before, would move up to the 35 percent tax bracket in the new system.
401K savings were left untouched. Some Congresspeople had suggested significantly reducing the tax-deduction benefits of the 401K, from the current $18,000 per year workers can put away to as low as $2,400. But the current plan has left this popular option for retirement savings alone.
You can write off up to $2500 in student loan interest. If you're still paying back student loans, you can deduct up to $2500 in student loan interest from your income.
Two taxes that impact the wealthy will disappear. If you're in the highest tax brackets, you may be in luck: The bill removes the alternative minimum tax, which often impacts high-income earners—and first reduces, then eliminates, the estate tax, which currently impacts families who inherit estates worth over $5 million.
You can use 529 plans to pay for private K-12 education. The 529 accounts, typically used to allow college savings to grow without paying tax on the investment gains, would be able to be used for up to $10,000 in elementary and secondary school tuition.
The Bad News
Your withholding may not be correct. The IRS withholding recommendations given to employers earlier this year may have resulted in a small bump in your paycheck—but you may need to pay that all back. The withholding amounts may have been incorrect, especially if you're a high earner or you have children or other dependents. It's too late to change your withholding for 2018, but you may want to change it for next year.
Personal exemptions were eliminated. Currently, families exempt $4,050 in income from taxation per person with the personal exemption. That goes away in the new bill—which could impact many families, but especially families who have more than one child.
State and local tax deductions were eliminated. If you live in a state with high state and local taxes—such as California, New York, New Jersey, Oregon, and Minnesota—you will no longer be able to deduct what you pay in taxes to your local government.
The property tax deduction was capped. Families can only deduct a maximum of $10,000 they pay in property taxes—a problem for families in states with high property tax burdens.
Dependent care account deductions were cut. Some families used dependent care accounts to save aside money pre-tax for childcare. That has been eliminated.
College tuition tax benefits were cut. The Republicans cut two educational tax credits, the Lifetime Learning Credit and the Hope Scholarship Credit, each of which can reduce a family's tax bill when they're paying for college.
Mortgage interest deductions may be reduced. Mortgage interest is a popular deduction for homeowners. Currently, you can deduct interest on home loans up to $1 million. People with existing mortgages will be grandfathered in, but on new mortgages, you will only be able to deduct interest on loans up to $500,000.
The medical expense deduction disappeared. If your family has significant medical expenses (more than 10 percent of your income), the current tax law allows you to deduct those expenses. But this new tax bill will remove that deduction.
The home equity loan deduction disappeared. If you used your home equity to redo your home or cover other expenses, you can no longer deduct the interest you paid from your taxes.
The deficit will increase. Republicans vowed that the tax cut would reduce the deficit, but projections indicated the bill would increase the deficit by $1.5 trillion over the next decade. And in fact, the Treasury Department indicated that the deficit has increased by 17 percent since the cut was introduced.
The tax cut helped corporations and shareholders more than workers. Researchers found that more than half of the tax-cut windfall went to shareholders (which was a good thing if you own stocks), while just 6 percent went to workers, most in the form of one-time bonuses. And most of the largest tax cuts went to the top earners—which led to some tone-deaf tweets, like this one from Paul Ryan touting the extra $1.50 one worker received in her paycheck.
The super bad news for the future: Many of these deductions are due to expire in 2026, which could increase your tax rate if you're in the middle class.