WASHINGTON – If you haven’t gotten yours yet, you should soon: a somewhat fatter paycheck, thanks to the tax reform bill passed by Congress and signed into law by President Donald Trump late last year.
But while you’re headed out to spend or save those newfound gains — admittedly modest, depending on your income — you may want to give some thought to what your tax liability is going to look like next year at this time, when you’ll be preparing to file your 2018 returns.
That’s because whether you’re a worker, retiree or small business owner (or even Dan Gilbert at Quicken Loans), you’re going to want to know the ins and outs of what is a dizzying array of tax changes, which, despite promises to the contrary, fell far short of simplifying the tax code for everyone.
“Every tax professional should have reached out to their clients and talked to them about this by now,” said Jeffrey Barringer, a partner at PricewaterhouseCoopers in Detroit. “If that hasn’t happened, they (individuals and businesses) should be reaching out to their accountants.”
If you are a regular employee or retiree, experts say you’re probably fine, especially if you already use the standard deduction (which is getting bigger) or, if you itemize and your deductions are under $12,000 (for a single filer) or $24,000 for you and your spouse.
If your tax situation is more complicated, though, you probably want to consult a tax professional, especially if you run your own business. And remember, if you need to make changes, you’ll want to do it early in the year, rather than waiting until later when those changes may either cost you more or have a more limited effect.
Here are some aspects of the new tax law to keep in mind, with the year still young:
- First, about those raises in your paycheck. They’re based on Form W-4 you’ve previously filed with your employer, which spell out the number of dependents you have, whether you’re claiming a child care credit and other information. New W-4s will eventually be issued but, in the meantime, the new withholding tables based on the old ones are generally seen as accurate. (New W-4s should eventually be posted at https://www.irs.gov/forms-pubs/about-form-w4 if you want to keep an eye out.)
- You’ll still want to review your paychecks to make sure the withholding seems generally in line with what it was before. In the next few weeks or months, the Internal Revenue Service should also create a new tax calculator for 2018 that will allow anyone to enter more specific information to determine whether your withholding is accurate for your personal circumstances. It’s especially important to do that if you live in a household with more than one income; you or your spouse’s employment situation has changed dramatically, or you have a more complicated tax structure, such as one where you itemize deductions. (If you want to run through some calculators now, the Washington-based Tax Policy Center’s is at http://tpc-tax-calculator.urban.org; the Tax Foundation’s is https://taxfoundation.org/2018-tax-reform-calculator/)
- The big news, income tax-wise, is that the new law cuts the rates paid on most individual tax brackets by 3 to 4 percentage points for single filers with adjusted gross incomes (AGIs) of $9,525 to $157,500 a year and married couples filing jointly with AGIs of $19,050 to $315,000 a year. (Some income brackets above those amounts are getting cuts too, they’re just smaller on a percentage-point basis.) The new withholding charts take that into account and that’s why you’re seeing (somewhat) bigger paychecks as your employer tries to balance what’s withheld with what you’ll likely owe. It’s not an exact science, however, and your W-4 doesn’t include all of your personal circumstances and itemized deductions, which is why it’s best to double-check yourself.
- The standard deduction you take on your federal tax return each year is almost doubling — from $6,500 to $12,000 if you’re single; from $9,550 to $18,000 if you’re claiming head of household status; and from $13,000 to $24,000 in you’re married filing jointly. Great news, right? Well, the flip side is that just as that is happening, the law eliminates the personal exemption which, as of 2017 (the tax year you’ve filed or are getting ready to file now), was worth $4,050 for each person living in your household, including yourself.
- Taken together, those changes could potentially have resulted in bigger tax bills for larger families. But Congress upped the child care tax credit from $1,000 to $2,000 and increased the income threshold before it begins phasing out to $200,000 single filers/$400,000 married filing jointly — meaning it can now largely offset that loss of the exemption.
- Also, since Michigan (like a lot of other states) asks you to use details from your federal tax return in determining your state tax (like how many of those soon-to-be extinct personal exemptions you were claiming), it meant you could have seen a tax hike from the state. But never fear: The Legislature has acted to not only maintain the state personal exemption but raise it, from $4,000 to $4,900 over four years.
- Now, about that larger standard deduction: if you currently itemize deductions but they don’t add up to more than the new standard deduction, your 2018 tax filing just got a whole lot simpler — just take the new, higher deduction when you file next year. If, on the other hand, your itemized deductions are more than that new standard deduction, you may want to talk to a tax professional because there are some important changes.
- For instance: You can continue to deduct your home mortgage interest taken out on a loan of up to $1 million on a principal residence before Dec. 15. 2017 or on one purchased after that worth up to $750,000 but you can only deduct interest on home equity in certain cases such as when it is used to buy a home or for home improvements. And while you can continue to deduct state and local taxes (including property and income taxes) from your federal return, it’s limited to $10,000 per filing. Taken together, that means you could owe more —regardless of your paycheck withholding — if you buy a more expensive house and/or pay more than $10,000 in state and local income and property taxes each year.
- If you itemize, you will also be able to deduct medical expenses above 7.5% of your gross income for this year, though the deduction bar moves back up to 10% next year. Also the current deduction for alimony payments to a former spouse will disappear for any agreements dated after Dec. 31 of this year. As for unreimbursed employee expenses, moving expenses and tax preparation fees, all those deductions are no more.
It’s also worth noting that taxes won’t be going down for everyone. The Tax Policy Center says about 5% of taxpayers will see their taxes go up.
Those are the major changes you’re likely to encounter, though there are others, too —like one increasing the exemption amount for the Alternative Minimum Tax (meaning fewer people will have to pay it) or getting rid of a deduction for charitable contributions to colleges and universities in exchange for tickets or seating rights at athletic events.
In the meantime, if you’re a business owner — or you’re thinking of becoming one —you’re likely to see some large changes as well. If you’re running, say, Ford Motor, you’re probably pleased with the news that a graduated corporate tax rate with a top rate of 35% is being dropped to a flat rate of 21%.
While there are a host of other changes, one other worth mentioning involves so-called “pass-through” businesses (which tend to be partnerships, sole proprietorships and businesses like that). The owners of those businesses tend to report their earnings as regular income rather than as corporate profits.
In a nutshell, the new change provides that individuals who file under those tax structures — or at least those who do so and meet certain restrictions — will be allowed to take a 20% off-the-top deduction of qualified business income.
That may not only help existing business owners, it may lure employees to set themselves up as independent contractors to take advantage of it (though that comes with restrictions and requirements, too).
“I have the possibility of getting an additional deduction for being a small business person. It’s really, really revolutionary,” said Leon LaBrecque, managing partner and CEO of LJPR Financial Advisors in Troy and cochair of the Michigan Association of Certified Public Accountants Special Tax Task Force.
Figuring all that out is not for the fiscal faint of heart — again, talk to a tax professional — and there are lots of restrictions regarding who can qualify, at what income level the deduction phases out, etc. For instance, LeBrecque said it means you — as a small businessperson —may want to look at reducing the compensation you pay yourself, for instance, with the balance going into your qualified business income, since the larger that is, the greater the benefit of the 20% reduction.
All these changes don’t come without concerns: The Congressional Budget Office said the tax reform law passed by Congress will increase the government’s deficit by $1.5 trillion over 10 years’ time. And many of the provisions — including those involving individual income tax returns — expire after 2025 (meaning back to higher tax rates unless Congress acts by then to extend them).
But, for now, the changes mean there may be more money in your pocket or your bank account, especially if you know how to use the new law to your advantage.
“I’m excited,” said LeBrecque, speaking particularly of the opportunities afforded to pass-through businesses and who might qualify for them. “This will apply to great big companies and little companies. … My niece is an Uber driver. She’s bemoaning this tax law sucks and I’m telling her, ‘Not for you.’ ’’