Tax reform made headlines at the end of 2017 but what exactly is in the new law and how will those changes impact you?
Timothy Ness from Ness Tax and Bookkeeping Service says the new law will not seriously impact most filing 2017 returns this tax season. The real changes will affect tax returns starting in 2018.
Ness states that the new law kept 7 brackets but lowered the rates on each bracket by approximately 2 percent. Based on available statistics, most South Dakotans will fall in either the 10 or 12 percent bracket for 2018 based on household income according to Ness.
“While the new bill eliminates exemptions as a deduction from total income in calculating taxable income (about a $4,000 per person elimination per return), the standard deduction is doubled for all filers,” Ness said. “This means that income for a married filing joint filer will be reduced by $24,000 instead of the current $12,700 before calculating tax. Depending on the composition of your household, this could result in lower taxable income to be taxed at the new lower rate.”
The new law doubles the child tax credit for children under age 17 from $1,000 per child to $2,000 per child. This credit is used to offset the tax that is calculated using the lower brackets. There is an additional $500 credit for those over age 17 who are listed as dependents on the tax return.
“Depending on the composition of your household,” Ness said, “these credits could be used to reduce tax to make up for the loss of personal exemption deductions. If your income is modest, up to $1400 of the credit can be refunded providing more money in taxpayers’ pockets.”
Because of the doubling of the standard deduction, it is estimated that 90 percent of filers will not be able to itemize their deductions because the hurdle to use them has been raised so high. Adding to that hurdle is the new limit on how much can be used as a deduction for state, local, and real estate taxes. The new law sets the cap at $10,000 which Ness states may not present a problem for most South Dakotans. But, for states with high income and real estate taxes, filers may not see the benefit they once did.
In addition, deductible mortgage interest on new homes valued at over $750,000 will be capped and home equity interest will not be deductible. Miscellaneous itemized deductions such as unreimbursed employee business expenses for mileage, meals, tools, hotel, etc.… will also be eliminated. This change could anger many traveling salespeople, tradespeople who must travel, mechanics who must purchase their own tools and transportation workers who will now not be able to write off these expenses.
“With the possible reduction or elimination of these itemized deductions,” Ness said, “charitable organizations worry that the loss of these other write offs will make people less inclined to give because there will be no tax advantage in giving. Many filers took our advice and prepaid real estate taxes and charitable contributions in 2017 which allowed them to get some tax advantage on the 2017 return which will be filed this coming tax season.”
Reports indicate that county and charitable coffers saw a December bump nationwide. Some counter that people will give even more to charity due to the cuts in other deductions.
“While subject to limitations, potentially the largest change came in 20 percent reduction of taxable income produced from a flow through entity such as a partnership, sole proprietorship, or S-corporation,” Ness said. “Potentially, this could mean that a farmer may pay tax on only $40,000 of the $50,000 net from farming operations. This change, along with faster write-offs of capital equipment and lower tax rates, could be a boon to farmers and small business.”
As with all things new, we must wait to see how things play out. But on the face of it, the new tax bill should leave taxpayers with more money in their pockets to improve their lives and the communities in which they live.
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