Changes To Tax Laws Advisors Need To Know For 2019

Taxes are intimidating for a reason – obscure laws, sneaky changes, and unclear intentions! It’s no wonder most people cringe at the thought of filing our taxes. Most of us, but not all of us.

Larry Schwartz loves taxes, and his passion for helping people get the most out of their return is contagious. Three years ago, I knew nothing about taxes and now I prepare other people’s returns for free. This article is an attempt to explain the new tax laws that take effect this tax season. It’s based on two talks Schwartz gave this month at the Peterborough Town Library.

The Trump administration’s Tax Cuts and Jobs Act was signed into law December 2017, and it brings a number of significant changes to how taxes will be filed beginning this year. In general, these changes will benefit higher income people and businesses and may or may not negatively affect others. So here goes:

The familiar Form 1040 has been replaced by the truncated 1040 plus five additional schedules. Each schedule consumes half of a page or less. This is significant for those who have their taxes prepared at places that charge by the page, soit is especially important to ask. Pages add up fast.

Other changes in the new tax law may affect people’s tax liability. The standard deduction is an amount that is applied automatically to each return that reduces taxable income. For 2017 this deduction was $6,350 for single or married filing separately, $9,350 for head of household, and $12,700 for married filing jointly. For 2018 these numbers jump to $12,000, $18,000, and $24,000 respectively. For older or blind filers the numbers are slightly higher. Also, for middle income filers tax rates are 3 percent lower than last year, except for the lowest bracket, which remains at 10 percent These changes may be viewed as mostly good news.

Now for some not so good news. The personal exemption deduction of $4,050 that used to be applied for each person claimed on a return has now been eliminated. So last year, a family of five could subtract $20,250 ($4,050 x 5) from taxable income, but not anymore.This is somewhat offset by an increase in the child tax credit and the addition of a new dependent credit.

The child tax credit applies to children 16 and under and has doubled to $2,000 for each child. If this credit doesn’t get used up offsetting tax liability, then up to $1,400 of it is refundable to the tax payer. The dependent credit is $500 for each person and applies to children 17 and older (often including those in college) and other dependents living in a taxpayer’s home, like a parent or even a friend.

The increase in the standard deduction this year means that fewer people will itemize deductions on Schedule A. This is because it will be much harder to get to a number that is larger than the standard deduction, which is in large part due to a limit on SALT (state and local taxes). The new law says that this combination of taxes cannot exceed $10,000 for deduction purposes.

So for a couple filing jointly with the standard deduction of $24,000 and SALT is maxed out at $10,000, there will be $14,000 left over for mortgage interest and donations. In addition, taxpayers may no longer deduct tax preparation fees, advisor fees, unreimbursed employee expenses, job search expenses, and employee business use of home expenses. Furthermore, the deduction for medical expenses still excludes 7.5% of income, so most people will not get any help there, especially if they have health insurance.

Another major change affects those who are self-employed. A sole proprietor or an LLC or even an S corporation will be considered to be a “pass-through entity” and will only be taxed on 80 percent of net income. This can have a big impact. However, this 20 percent reduction does not apply to self-employment taxes and because of the way it is deducted, it may not have as big an impact as anticipated for many small businesses.

Thankfully, many of the credits and deductions people are familiar with remain unchanged under this new law. For example, some adjustments to income that still stand are teacher’s credit, health insurance deduction, moving expense, IRA contributions, and student loan interest deduction. And there are still after-tax credits that offset income tax liability (think gift card), such as retirement savings, dependent care, foreign tax credit, and some energy credits.

Many people are able to file taxes themselves using software that walks them through the process and this can save having to pay a preparer. But many other people would be wise to have someone help them with their taxes, especially those looking forward to a refund.

Filers with incomes of less than $60,000 can have their taxes prepared for free at a number of locations throughout the state. There are two free sites in Peterborough. One is a Volunteer Income Tax Assistance site at The River Center; call 924-6800 for appointments. The other is a new program, FYI (File Your Income) Taxes, sponsored by the Peterborough Town Library and headed up by Schwartz. It will take place at Scott Farrar this year; call 525-3068 for an appointment. FYI Taxes also has sites at The Grapevine in Antrim (588-2620), Fuller Library in Hillsborough (464-3595), and Reality Check in Jaffrey (532-9888).

Katie Wilson lives in Dublin and is on the Board of The River Center.