To answer the question above: Quite a bit. 

Beth Tallman provides a detailed response to the question below with links to lots of great sources of information. Thank you for tackling this challenging topic Beth! 

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The Atlantic summed up the 2018 tax filing season pretty accurately with the title of their article on the subject in March: “Taxpayers are Very Confused. “ The CBS News article is similarly titled, “Americans shocked by impact of the new tax law.” The source of the confusion and shock is the 2017 Tax Cuts and Jobs Act.  Given today’s April 15 has come and gone, you have likely experienced this confusion to some extent yourselves.  More data on the impact of the new tax law will be released once returns are processed, but we will try to outline the major changes to the tax law and discuss what many taxpayers found this year.

Tax breaks gone/standard deduction up (CNBC)

The most noticeable changes to the tax law include the elimination of the personal exemptions ($4050 per taxpayer), and increase in the standard deduction to $12,000 for single taxpayers and $24,000 for those filing jointly.  It is estimated that only 10% of filers will itemize for 2018, a drop from 46.5 million people in 2017 to 18 million people for 2018.

What deductions are gone?

• You can no longer deduct unreimbursed business expenses.  
• You can only deduct casualty losses if the president has declared a natural disaster covering you (and your loss is more than 10% of your AGI).  Note: this change will go away in 2025.
• The most controversial change is perhaps the limit on SALT (State and Local Tax) deduction to $10,000.  This would be the total of property taxes, state and local income taxes or state sales taxes paid. (The Detroit Free Press explains this well.)
• Mortgage interest is deductible on “qualified real estate loans” totaling $750,000…down from $1 million limit (excluding home equity loans).
• Interest on Home Equity Loans/Lines of credit are only deductible if they are used for home improvement, limited to $100,000, and are included in the $750,000 calculation above.
• Charitable deductions don’t really count unless you surpass the new, higher standard deduction.
• The medical and dental expense deduction threshold was lowered to 7.5% of income from 10% for 2017 and 2018 only, but like the charitable deduction, can only be claimed if your total deductions exceed the standard deduction amount.

Note: even if you can no longer itemize on your federal income taxes (because your deductions don’t add up to more than the new, higher deduction amount), CNBC suggests you shouldn’t assume that you can’t itemize for state taxes.

Tax rates

Now that we have established the differences to calculating taxable income, let’s look at the tax rate changes.  How much did the rates change? How big of an impact does that have on taxes paid?

Here are a few examples for earned income.  Remember that the amounts listed are taxable income, which we already explained might be very different for people this year.

• $50,000 taxable income filing as single: dropped by $1300
• $50,000 taxable income filing jointly: dropped by $949
• $100,000 taxable income filing single: dropped $2692
• $100,000 family income filing jointly: dropped $2599
• $200,000 taxable income filing single: dropped $4040
• $200,000 family income filing jointly: dropped $6306

The capital gains tax remains largely the same, but the threshold for paying 0% taxes on them increased slightly (under $1000 for single filers and just over $1000 for joint filers).

Changes to Child Tax Credit

This one is REALLY complicated!  I’ve read this a few times and summarizing is difficult.  Basically, instead of the personal exemption for dependent children, the child tax credit went from $1000 to potentially $2000.  The definition of a qualifying child is pretty strict, and a new condition for this year is that the child must have a Social Security Number. There are circumstances that may lower the tax credit below $2000.  The other major change is that some part of the tax credit may generate an actual refund and not just offset a tax liability.  Again, there are conditions that may reduce or eliminate that amount.  The first condition is that your income must be earned income.  For more on this topic, check out the Balance.

Just because a child is a dependent does NOT mean they don’t have to file an income tax return.  So when does this occur? According to a step by step guide on filing taxes for children, Investopedia explains:

Four basic tests determine this, any one of which requires a federal income tax return to be filed for a given year:

• The child has unearned income (from investment interest, gains, et al.) above $2,100

• The child has earned income above $12,350

• Gross income is greater than the larger of $1,050 or earned income (up to $6,000) plus $350

• Net earnings from self-employment are $400 or more

Withholding is key

Few people revisited their W-4s after the Tax Act became effective.  As a result, too little was withheld throughout the year. This NYT article gives some examples of how the withholding table changes from 2017 to 2018 led to lower or no refunds.  While for most, the total tax bill was lower, many more people where shocked to discover they owed (a significant sum) in taxes when historically, they were always very close (or banked on a refund). NBC’s piece explaining what to do if you found yourself owing taxes you couldn’t afford includes lots of other helpful info, including a video about withholding and the new W-4, and a link to the IRS’s withholding calculator.

According to a GAO report to congress, it was estimated that 21% of taxpayers or 30 million people would owe taxes for 2018.  It appears that employers lowered withholding by MORE than the decrease in tax liability. (Full disclosure, this was the case for our taxes!  I never did the calculations myself. It was pretty shocking, but luckily, I stashed enough cash to pay the tax bill!)

What about State Income Taxes?

Watchdog.org provides a good summary of state income taxes, what states collect and include an interactive map to look more deeply at your own state.  Several states dropped rates in some way (Arkansas, Georgia, Idaho, Iowa, Missouri, North Carolina, Utah and Vermont) after the Federal tax overhaul.  If you live in one of these states you can get the details in this article.

Filing Changes on the Horizon

There is a bipartisan bill (Taxpayer First Act) in Congress that would permanently ban the IRS from offering a free tax filing service. Currently if you file online, you use a private service (either H&R Block or Intuit’s Turbo Tax). If you make under $66,000, the service is free.  Here are some shocking stats on that feature:

The Free File Alliance, a private industry group, says 70% of American taxpayers are eligible to file for free. Those taxpayers, who must make less than $66,000, have access to free tax software provided by the companies. But just 3% of eligible U.S. taxpayers actually use the free program each year. Critics of the program say that companies use it as a cross-marketing tool to upsell paid products, that they have deliberately underpromoted the free option and that it leaves consumer data open to privacy breaches.

NPR interviews the author of the ProPublica reporter who wrote this story. This will be one to keep an eye on.  If you need more to increase your blood pressure, (WAPO) explains how another player is offering free filing—in exchange for your data.

A Global Perspective on Taxes

Do you think taxes are high in the US?  Sometimes it is important to check the global perspective. Check out this chart from Forbes showing where we stand internationally.  One interesting look here is the breakdown of taxes between income taxes and social security type taxes. NGPF recently had a Question of the Day that compared tax rates in the developed and developing world. 

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Be sure to check out NGPF's updated Taxes Unit. If you plan to teach students how to file the 1040-EZ, well, let's just say you are out-of-date with your tax knowledge. 

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