The first tax season under the new Tax Cuts and Jobs Act is in full swing, and some filers have been surprised to see smaller than expected refunds. According to the IRS, the average refund as of February 8 is $1949, down $186 from the same time last year.
The deadline to file is still nearly two months away, but it’s a good idea to start calculating now to give yourself time to familiarize yourself with changes to the tax law. Here are some of those changes.
The IRS’s 2018 tax rate table.
In most brackets, individual income tax rates have fallen. There are still seven tax brackets, but tax rates are lower in five of the brackets than they were in 2017. The tax rate on the highest earning bracket, which topped out at 39.6 percent in 2017, is 37 percent.
Changes to the personal exemption and standard deduction. The new tax law eliminated the personal exemption of $4,050 for yourself and each of your dependents, but it has increased the standard deduction to $24,000 for joint filers, or $12,000 for single filers. If your family has fewer dependents, that’s good news. But if you have several dependents, this might mean more of your income is taxable.
The child tax credit has increased. Families earning up to $400,000 can claim this credit, which has increased from $1000 to $2000 for the 2018 tax year.
New limits on state and local income tax deductions. In previous years, homeowners could deduct their entire state property tax bill on their federal return. The new tax law caps these deductions to $10,000. Homeowners in states with high property taxes, like California, may be forced to take a smaller deduction.
Moving expenses are no longer deductible. if you’re relocating, you can no longer deduct expenses related to your move. Exempt from this part of the law are active duty military personnel and companies that move.
529 education accounts. These plans have historically been college savings plans, but under the new rules parents will be able to use the money saved in a 529 plan for educational expenses that aren’t associated with college, including private elementary, middle, and high schools. Some states, including California, may require you to pay state income tax and penalties on the money withdrawn from a 529 account.
Withholding changes. The IRS has been encouraging taxpayers who owed taxes or received a large return last year to file a new W-4 with their employer to change the amount of taxes withheld from their pay. Withhold too much and you’re providing the government with an interest-free loan. Withhold too little and you may be hit with a surprise at tax time.
If you have questions, contact a tax preparer. California law requires anyone who prepares tax returns for a fee to be licensed, either as a tax preparer with the California Tax Education Council, or as a certified public accountant (licensed by the Board of Accountancy), enrolled agent (licensed by the IRS), or an attorney (licensed by the state bar). Certain specified banking or trust officials may also prepare returns in select cases.
