Look Out For These 5 Changes When Filing Taxes For Your Federal Refund
The 2019 tax season marks the second year of the new tax code. In 2017, the United States government passed the Tax Cuts and Jobs Act (TCJA). Across all tax brackets, the average federal tax obligation decreased by $1,750. Many corporations and small businesses received tax breaks as well. The TCJA was also designed to simplify the tax process. Significantly more Americans are claiming the standard deduction now instead of itemizing their federal tax return.
Read on to learn about filing taxes for your federal refund under the new law and explore five major changes to look for when preparing your taxes this year.
1. Doubling the Standard Deduction
Perhaps the most profound tax change is the doubling of the standard deduction. Why is this change so impactful?
The biggest advantage is that millions of tax filers no longer need to itemize. This means that you can save substantial time completing your taxes. You no longer need to collect receipts for charitable donations or wait for a mortgage interest form.
In addition to simplifying the process, there is also a sizable tax benefit. The standard deduction is subtracted from your income. The resulting adjusted gross income is the figure that Uncle Sam uses to determine how much you owe.
In 2020, the standard deduction is $12,400 for tax filers who are filing as single or married filing separately. This figure doubles to $24,800 for married couples who are filing taxes jointly. Lastly, head of household filers receive a standard deduction of $18,650.
These figures are slightly higher than they were for the 2018 tax season. It is important to remember that claiming the standard deduction removes other popular deductions from consideration. For example, you can no longer claim state and local taxes (SALT).
It is important to remember that it still may be more beneficial to itemize over claiming the standard deduction when filing taxes. The best course of action is to turn your data over to a tax professional and let them calculate your best option for filing taxes.
2. Tax Refunds Are Down
In spite of the obvious tax benefits in the TCJA, the average tax refund is down. In fact, the average refund dropped in 2019 under the new tax law. This seems off and has raised questions among many Americans.
The answer is actually quite simple. After the TCJA was implemented in 2018, the United States Treasury Department changed the withholdings calculation. This affects the amount of federal income tax that is withheld from your weekly or biweekly paycheck.
The result was that Americans received more take-home pay. For some, this recurring pay increase was unnoticeable as it was spread over 26 or 52 paychecks.
Consider a person that experienced a $1000 tax benefit due to the Tax Cuts and Jobs Act (TCJA). If this person is paid biweekly, they may see an extra $38 per pay period.
A figure that amounts to a tank of gasoline is hardly noticeable. Over the course of a full year, however, it adds up to a significant tax benefit.
There are only a few ways to compare your taxes under the old system and the TCJA. Assuming all things remain equal, you can compare your total tax obligation from 2017 to the current bill.
Another method is to calculate your effective tax rate by dividing tax owed into your 2017 gross income. Perform the same calculation for 2019 gross income. Lastly, multiply your 2019 effective tax rate by 2017 gross income and see what the delta is.
The IRS has a withholding calculator on its website. If married filing jointly, it is recommended that both spouses run the calculator before filling out W4 forms.
3. Child Tax Credit
Many tax filers were dismayed at the TCJA’s elimination of personal exemptions. Under the old tax code, filers could reduce their taxable income by claiming personal exemptions.
Personal exemptions generally came in the form of spouses, children, or other dependents. In 2017, the personal exemption amount was $4,050. Joint filers with 3 children could reduce their taxable income by over $20,000.
The good news is that personal exemptions were replaced by the child tax credit. In general, tax credits are more desirable than a deduction. This is because a credit directly reduces your tax obligation instead of your taxable income.
Under the TCJA, the child tax credit is now $2,000. This is double the amount it was under the prior tax code.
4. SALT Cap
Earlier, we mentioned that one of the most popular deductions under the prior tax code was SALT. This allowed tax filers to deduct state and local taxes.
The SALT deduction was especially popular in coastal states with high property taxes. In states like New York and New Jersey, it is not uncommon to have a property tax bill in excess of $10,000.
Unfortunately, the TCJA caps the SALT deduction at $10,000.
For many tax filers, the SALT cap is insignificant because of the doubled standard deduction. These filers do not have enough deductions for it to create any serious effect on their tax filing. However, the cap does erode some tax benefits for high earners who are more likely to own affluent homes with high property taxes.
If you itemize, the $10,000 SALT deduction may still be viable. However, you should know that your state tax refund is taxable by the feds if you claim the SALT deduction.
5. Qualified Business Income Deduction
Another major perk of the new law is delivered to small business owners. It comes in the form of a qualified business income (QBI) deduction.
The QBI deduction allows you to reduce taxable income from your business by up to 20 percent. It is a sizable tax benefit for S-corporations, sole proprietorships, business partnerships, and even some estates.
You will receive the full 20 percent deduction so long as business income does not exceed thresholds set by the IRS. These thresholds are $315,000 and $157,500 for married couples filing jointly and all other taxpayers, respectively. The percent deduction is gradually phased out as your business income grows over these thresholds.
Filing Your Federal Tax Refund – A Recap
Depending on your income and withholding strategy, tax season generates very different emotions. Some filers excitedly wait for their tax refund, using Uncle Sam as a forced savings mechanism. Others dread the April deadline as they are legally bound to make a huge tax payment to the government.
If you require help filing your federal tax refund, contact us today to set up an appointment when filing.