The personal tax return deadline has passed us, but if you extended your tax return, there’s still time to make sure you take advantage of the changes to the tax code. With so many uncertainties surrounding not only the government shutdown, but also the new tax laws, many taxpayers are facing some new challenges that they may not even be aware of yet. Keep reading to gain some new knowledge on your taxes, as well as refresh your mind on some classic tips!
Tax Deduction vs. Tax Credit
We often hear the terms “tax deduction” and “tax credit”, but what many people don’t realize is that these are entirely different terms and can have an entirely different effect on your tax return. A tax deduction is an amount that you can subtract from your AGI (Adjusted Gross Income) that will make your actual taxable income lower. A tax credit, on the other hand, is a reduction in your actual tax bill. For example, if you owe $500 in taxes but qualify for a $1,500 tax credit, you will receive a check for the difference of $1,000.
The table below from NerdWallet shows a more tangible version of what this difference really looks like.
Itemizing vs. Taking Standard Deduction
There are two ways to claim your tax deductions – you can either take the standard deduction or itemize your deductions. The standard deduction is a standard dollar amount reduction in your AGI. Itemized deductions are expenses that are eligible to claim on your federal income tax return that end up decreasing your taxable income. With the new tax changes (see our blog post about the Government Shutdown and the TCJA), the standard deduction nearly doubled, meaning that many taxpayers won’t be itemizing their deductions this year.
What Are Some Things to Keep In Mind for the 2018 Tax Year and Future Tax Years?
- In 2019, most retirement accounts have a higher maximum contribution cap, meaning it’s a great opportunity to save a bit more and be able to reap those benefits in the future.
- If you typically itemize your deductions, look into the standard deduction, and see if that might be more beneficial for you.
- Find out if your tax bracket has changed – with the TCJA, income tax brackets have changed, and you may fall under a different tax bracket than previous years. With this new knowledge, you may want to change your withholding for future tax years.
- If you did not have health insurance in 2018 – don’t worry! The new tax law eliminated the penalty for not having consistent medical insurance.
- The Child Tax Credit increased and more of that credit is now refundable. In previous tax years, the credit was up to $1,000; it is now up to $2,000 per qualifying child.
- If you moved this year, you can no longer deduct those costs. In previous years, you could deduct relocation costs such as movers or gas, but that deduction is no longer available.
- If you are married and filing jointly, you may actually save money. The TCJA eliminated the marriage penalty for couples who make less than $60,000. For example, if you both make the same income and file jointly, you can file for your combined total income and probably will not end up in a higher bracket.
- The TCJA eliminated the alimony deduction – you can no longer deduct alimony payments and the partner receiving the alimony can no longer claim it as income.
With all this said, the Tax Cuts and Jobs Act is an extensive piece of legislation and the above information only scratches the surface of the many changes in tax law this year. It is highly recommended that you meet with a tax professional to help you navigate these revisions and get the most out of your tax return this year. At Semaphore, we are more than happy to help! We can be reached here to assist you with your tax needs.