Tax reform — it’s a term we have all heard a lot recently, but many of us may not know what it actually means. Here is the one sentence summary — The Tax Cuts and Jobs Act (TCJA) was signed into law December 22, 2017, and introduced several significant changes to tax law provisions that will affect the taxes of most taxpayers. And it IS ultimately important/relevant to your financial health — so listen up!
It’s ok to admit that most of us probably don’t even start thinking about taxes until a few months before April 15th (*due to COVID-19 the 2020 tax date has been pushed back to July 15th, 2020). But no slacking off on our watch! Let’s get you up to speed and informed so that by the time January rolls around you don’t find yourself asking, “what the finance does tax reform mean for my tax refund?!”
Tax reform introduced several big updates including lower income brackets and changes to tax deductions, meaning you’ll likely encounter some new situations on your taxes this year. Here’s a quick rundown of top changes that might affect you this upcoming tax season.
Lower Tax Rates and More Money
One of the biggest revisions under the new tax law is that five of the seven tax rates were reduced by about 1-4%, which is why you may have been seeing more dough in your paycheck every month this year. But don’t scream “CHA-CHING” just yet, this brings us to the next update…
There’s Nothing Standard About This Deduction
When completing your taxes, you must choose if you want to take the standard or itemized deduction. Most millennials tend to choose the standard deduction path because their taxes are often more simple and tend to not qualify for most of the available itemized deductions like the home mortgage interest deduction. However, if you thought 2018 was the tax year you could finally itemize your deductions and claim all of the bags of clothes you donated to your local Goodwill, you might be out of luck from a tax perspective.
The new tax law almost doubled the standard deduction for single filers to $12,000, while married couples get $24,000 and eliminate or limits the number of common itemized deductions many people took in past years. As a result, you may benefit from taking the standard deduction this year if your Goodwill contributions and other itemized deductions do not exceed that standard deduction amount. In fact, TurboTax estimates nearly 90% of taxpayers will take the now higher standard deduction, up from an estimated 70% last year. This doesn’t mean you should stop doing good for people and stop donating clothing and household goods you no longer need.
Mo’ Mortgage Mo’ Problems
If you’ve been in the market for a new home recently — take note! The new law lowered the threshold at which you can deduct home mortgage interest on loans secured after December 15, 2017. Under the new law, the amount of mortgage interest that can be deducted is based on a loan of $750,000, down from $1,000,000 under the previous law. If your loan is more than $750,000 and you took it out after December 15, 2017, you’re out of luck on the portion of interest based on the loan amount that’s more than $750,000.
The new law also limits the amount of state and local property, income, and sales taxes that can be deducted to $10,000. In the past, these taxes have generally been fully tax deductible.
So if you’re considering buying a new home in a state with high property prices, don’t forget to have an open mind and look at areas that could offer more affordable prices or put more money down to save your debt-to-income (DTI) ratio some heartache. Not sure about your DTI? Learn how to calculate your debt-to-income ratio with Turbo for free!
Same Old Student Loans
By now you’re probably thinking, “jeez was there anything that wasn’t changed by tax reform?!” The short answer — yes! The tax benefits for education remained largely intact. The American Opportunity Tax Credit, Lifetime Learning Credit, and the deduction for student loan interest, all survived and could help you reduce this year’s tax liability.
Pro tip: if you qualify for the student loan interest deduction, don’t forget to take it! You can still claim the deduction even if you take the standard deduction. Yet another way your student loans can actually benefit you.
Taxes and Personal Finances
Now that you’re a pro on tax reform, or at least knowledgeable enough to discuss the topics at your next holiday party, let’s talk about this will affect your financial health. You’re probably already feeling the impact of the extra money in your paycheck from the new lower tax rates (yay!), however, try to put this extra cash to good use. (Hint: paying down debt!)
As for your credit score, it will likely remain unharmed by tax reform — that is unless you avoid paying taxes you owe. While your score won’t be hurt simply by owing back on your taxes, it can be dinged if you miss your payments. The IRS is typically willing to work with individuals who can not meet their payments but be sure to address the issue early before any actions are taken that could lower your credit score. If you can’t pay what you owe, you can request to pay via an installment agreement, which will allow you to pay what you owe over six years.
Hopefully, these insights can give you peace of mind as we head closer to tax season. If you still have questions about your specific tax situation, be sure to check out the TurboTax Tax Reform Center for more information from our tax experts.
Don’t worry about knowing these tax law changes. TurboTax has you covered and as always, will be up to date with the latest tax law changes when it’s time to file. TurboTax ask you simple questions about you and gives you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent to get your tax questions answered. A TurboTax Live CPA or Enrolled Agent can even review, sign, and file your tax return.
And now, the best part about getting ahead of your taxes: brainstorming all of the ways you can use your refund! Think: paying off student loans, credit card debt, or just putting the extra money away for a rainy day. How are you planning to use yours?