In 2019, Americans around the world began filing their taxes under the new Tax Cuts and Jobs Act. Some tax breaks have been eliminated or capped, while others have been expanded or introduced.
Clients have begun to weigh in on some of the hard-to-understand aspects of the new tax laws. As we enter March, our firm accountants have seen their fair share of common questions surrounding the new filing requirements and limitations. Here are the top five questions we hear and how they are answered:1. I thought my tax bill was going to decrease. What happened?
For many people living in high-tax states like New York, California, New Jersey and Connecticut, there’s one overriding reason their tax bills have risen: Their state and local tax deduction, known as SALT, will be capped at $10,000. This includes state and local income taxes, as well as real estate taxes.
New York City residents, for example, often have state and city taxes that total nearly 10 percent of their income. So, if your state and local income taxes already exceed the $10,000 limit, you lose the ability to deduct any of your property taxes.
As a result, some taxpayers are finding that instead of itemizing, it’s better to take the larger standard deduction. Even though tax rates have decreased it usually does not make up for the loss of one of their largest itemized deductions.2. I was told there would be a tax cut for most people. So why is my return showing a tiny refund, or even an amount due?
In early 2018, the I.R.S. took its best shot at offering guidance to employers about how to change tax withholding from paychecks. In general, it suggested decreases, since the 2017 law was supposed to be a cut. That should have resulted in higher paychecks for most people.
But if you were an employee receiving those checks, you may not have noticed the increase. If that was the case, you won’t be seeing the usual April refund: You’ve already gotten it, just parceled out into slightly higher 2018 paychecks.
Want to get a refund next year? Check out the I.R.S. withholding calculator to adjust your paycheck.3. Should I take the standard deduction or itemize my deductions this year?
Before discussing what’s changed, let’s explain the basics: Taxpayers are entitled to take a standard tax deduction amount, or they can itemize their deductions; they can deduct whichever amount is higher, resulting in a lower tax bill.
Under the new tax law, the standard deduction has doubled (to $12,000 for individuals and $24,000 for joint filers), while several itemized deductions have been eliminated or limited (see questions 1 & 4.) TurboTax estimates that as a result, nearly 90 percent of taxpayers will now take the standard deduction, up from about 70 percent in previous years.
4. Have any popular deductions and credits changed? What did we lose, and what can I still claim?
Dependent exemption: Under the previous law, families were able to claim a $4,050 exemption for each qualifying child, but that deduction has been eliminated. Instead, if you have children under the age of 17, you may qualify for the child tax credit, which was raised to $2,000 from $1,000 for each child. More people will qualify now that the credit begins to phase out at $400,000 in income for joint filers ($200,000 for individuals.) The law also introduced a $500 credit for other dependents, which could include elderly parents or children over the age of 17.
Mortgage interest: If you itemize, you can deduct the interest paid on the first $750,000 in mortgage indebtedness on loans taken out after Dec. 15, 2017 (on first and second homes). Older loans are grandfathered: You can still generally deduct interest on up to $1 million in mortgage debt on loans taken out before Dec. 16, 2017.
Interest on home equity loans, or lines of credit, are now only deductible if the debt is used to “buy, build or substantially improve” the home that secures the loan. You can no longer deduct the interest if you pay off credit card debt, for example.
Alternative minimum tax: Far fewer people are expected to be snared by it because so many of the old tax breaks that set off the so-called A.M.T. have been eliminated or reduced. In addition, the minimum exemption level has increased to $109,400 for joint filers, up from $84,500; and to $70,300 for individual filers, up from $54,300. The exemption begins to phase out at $500,000 for single filers and $1 million for joint filers.
Unreimbursed employee expenses: A number of employees’ business expenses that weren’t reimbursed by their employers — like classes and seminars — are no longer deductible.
Moving expenses: Workers moving for a new job were once able to deduct related expenses. That has been wiped away, except for members of the military.
Tax preparation fees: If you itemize, you could typically deduct the amount your tax preparer charged or similar tax-related expenses, like software bought to file electronically. This is no longer possible unless you are self-employed.5. I heard that small business owners can’t deduct meals and entertainment anymore. Is that true?
You can no longer deduct entertainment or amusement, generally defined as taking a client to, say, a basketball game. But you can still deduct 50 percent of what you spend on meals, as long as you are dining with clients, traveling for business or attending a business convention (or something along those lines). The meals cannot be lavish or extravagant. Providing meals to employees for an office party or a meeting is still 100 percent deductible.
There are specific rules you may need to follow. If you paid for a show and dinner on one bill, for example, it must be itemized — and the amount paid for meals must be clearly stated. If it’s not, then no deduction is allowed.