Abacus: Relish The Taxes You Had
With tax season nearing its end, many might be thinking about when to file their taxes. With the deadline to file pushed to April 18 due to holidays, some might think that leaves them with plenty of time to file. However, with the new Tax Cuts and Jobs Act that took effect at the start of this year, this may be the last time you see some deductions and credits before they change come next year’s filing time.
One of the main reasons why these changes to deductions and credits are so important is because they determine how much your taxable income is. For first time taxpayers or those otherwise unfamiliar with the term, your taxable income is the amount used to determine how much tax you owe the government. This is especially important since most income tax rates are set to decrease, with the ranges for the income brackets set to change alongside them. With the exception of the 10 percent tax rate maintaining its respective income range for each form of individual filing, all other rates will change next year. However, the effects of these decreased rates will only be fully realized by some filers.
Source: Tax Foundation
Some filers may see little or no change in their tax rate, while a few who have large taxable income will experience the opposite and have a higher tax rate. For example, current law states that single filers with a taxable income between $38,700 and $93,700 have a tax rate of 25 percent. But by next year, their rate will go down by 3 percent except for those whose taxable income is between $82,500 and $93,700 for whom the rate only goes down 1 percent.
Source: Tax Foundation
For married individuals filing jointly, they’ll experience less discrepancies when it comes to the change in income limits. Married couples whose taxable income is between $315,000 and $400,000 will see their tax rate decrease by 1 percent, which is lower than the 9 percent decrease the rest of their current tax bracket will experience next year. And for those whose taxable income falls between $400,000 and $424,950, their tax rate will increase by 2 percent. Besides these two ranges, married couples filing jointly will see significant decreases in their tax rate.
To see how much taxable income you have, you must first subtract the deductions and credits applicable to you from your gross income. However, for older, taxpaying millennials, the upcoming changes to some deductions will make your 2017 taxable income particularly special compared to the coming years.
According to current law, the amount you can claim for your state and local tax deduction is unlimited. For millennials living in states with high taxes, this is particularly helpful. These taxes include property, individual income, sales and excise taxes taken as a percentage of total personal income. However, this deduction will be capped at $10,000 for next year’s tax returns. And for people living in states like New York, New Jersey and California, which are among the top ten states with the largest overall tax burdens, this change will be felt more than others.
Top Ten U.S. States With The Largest Overall Tax Burden
Furthermore, this year will be the last time you can claim personal exemption until 2025. For millennials who are claimed as dependents on their parent’s tax return, this change won’t be noticeable. But for millennials who claim themselves and, if married, their spouse, their 2017 tax return is their last chance to claim the $4,050 for their personal exemption(s).
Similar to the personal exemption, the deductions for commuter and moving expenses will also be eliminated for next tax year. People who typically claim these deductions are those who are not reimbursed for traveling to and from work, as well as those who relocate for work reasons. For millennials living in major cities, especially where the standard of living is high, they may deal with these expenses on a regular basis. Under the existing tax law, for example, you’re allowed to remove no more than $20 per month from your income for expenses related to bicycle commuting to work if it isn’t included in your employment benefits.
The last deduction millennials can potentially claim for this year’s tax returns is the deduction for your tax preparation expenses. These expenses are applicable when you pay for a professional or a tax preparation software to file your taxes. The fee for filing your taxes electronically is also applicable for the deduction. It’s safe to assume that many taxpayers, especially first-time filers like some millennials, will claim this deduction as many prefer their tax returns filed as accurately and quickly as possible.
Source: Tax Foundation
With many changes being made to itemized deductions for the 2018 tax returns, experts believe more taxpayers will use the standard deduction instead. The standard deduction is the nontaxable portion of income that an individual can use if they don’t use the itemized deduction method to find their taxable income. Currently, the standard deduction set for this year’s tax returns are $6,000 for single individuals and $12,000 for married individuals filing jointly. Depending on the total amount of deductions one could claim on their tax return, some may find that they can receive more benefits from itemizing their deductions rather than using the standard ones. Although according to the Tax Policy Center, only 47 million people out of 150 million taxpayers choose this method.
However, with the new tax bill, the standard deductions for 2018 tax returns will double to $12,000 for single filers and $24,000 for married couples. With less itemized deductions applicable to their 2018 tax returns, the Tax Policy Center expects that the number of taxpayers who choose to itemize will go down from around 30 percent to 13 percent, or 19 million people. Surely if filers have less deductions that are applicable to them, then they will choose the method that provides them with the most benefit.
Nevertheless, there’s no one way to file your taxes as each filers situation is different. With the tax reform set to completely ramify the way future tax returns are filed starting next year, the differences in what deductions are applicable to you will become more apparent. The best suggestion is to inform yourself on how those changes will apply to you depending on your plans for the rest of this year, whether you plan on buying a house or have a child with your loved one. And always seek help from a licensed tax advisor to better prepare for what you might be up against.