Tax season: Top 3 changes that may affect you
Taxpayers can begin to file their 2018 returns later this month, the first season under the Tax Cuts and Jobs Act, which was signed into law in December 2017.
Despite the fact that the tax law triggered the biggest changes to the U.S. tax code in more than three decades, 85 percent of Americans reported being only slightly familiar or not familiar at all with the changes to the law that might affect them, according to a recent survey from tax preparation firm Liberty Tax.
The Tax Cuts and Jobs Act enacted a sweeping overhaul of the nation’s tax code – impacting everything from the standard deduction to personal exemptions.
Here are some of the biggest changes Americans need to know heading into the upcoming tax season.
State and local tax deduction caps
One massive change that stands to hurt some middle- to upper-class Americans in higher tax states is the new cap on state and local tax (SALT) deductions.
“The biggest [change] by far is the cap on the state and local taxes, including the real estate taxes,” Lisa McCann, special counsel at law firm Withers Worldwide, told FOX Business.
The Tax Cuts and Jobs Act decreased the cap on SALT deductions to $10,000, which is well below the average amounts claimed by individuals residing in states such as New York, California and New Jersey. The average deduction claimed in California, for example, is $22,000.
Americans will also no longer be able to deduct property taxes on foreign residences.
Increased standard deduction
While it may not ease the pain for wealthier Americans taking a hit from the new SALT cap, an increased standard deduction – nearly doubled for both individual filers and married couples – will help those in the lower- and middle-income brackets.
For individuals, the standard deduction was raised to $12,000. For married couples filing jointly, it is $24,000.
For many people that means it will no longer be beneficial to itemize.
“People in the lower-income brackets are going to benefit,” McCann said.
As previously reported by FOX Business, there are ways interested taxpayers can take advantage of the new law by itemizing some years and claiming the standard deduction in others – a strategy known as “bunching.”
By timing your payments strategically – paying your mortgage on Jan. 1 instead of Dec. 31 for example – you can maximize the amount of deductions in some years, while taking the standard deduction to offset the other years.
Some items that could work for a bunching strategy include medical payments, charitable contributions and mortgage payments.
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New forms
The Trump administration sought to simplify the documentation process for Americans, famously claiming filers would be able to fill out their taxes on a sheet the size of a postcard.
A proposed draft of the document was first released in June, and while the return was less than one page -- with slightly more than 20 lines – there are six additional schedules that taxpayers may be required to attach to the main form.
“I don’t think it’s going to be simplified,” McCann said, adding that there are six additional schedules to explain things that used to be contained in the first two pages of the return.
The administration has also yet to release a new W-4 form to coincide with the revamped tax law, so surprises could be in store – both positive and negative – for taxpayers who failed to heed IRS warnings to check their withholding amounts.