As Ventura resident Jocelyn Smith prepares to file for the 2018 tax season, she is concerned that she will have to owe more than in past years under the new tax bill.
“It’s just so confusing,” Smith said. “I keep hearing about all of the changes and I really don’t want to have to owe. I am trying to save for my first home.”
Smith is not the only one who has expressed concern over the Tax Cuts and Jobs Act. Passed by Congress in December 2017, the U.S. Congress’s Committee on Ways and Means said the new act serves many purposes, including simplifying the tax process, preserving the mortgage interest deduction, eliminating Obamacare’s individual mandate penalty tax, increasing the standard deduction, providing more support to American families, providing relief for Americans with expensive medical bills and improving savings vehicles for education.
Danielle Brinkman, certified public accountant with Farber Hass Hurley LLP in Oxnard, believes that the new tax bill will benefit more residents than hurt them.
“I think for most people it will be helpful,” Brinkman said. “The tax brackets are lower and my average client will pay less tax overall.”
Most Americans saw an increase in their paychecks earlier last year because of the new brackets. Brinkman said it’s normal when a new administration takes over that misunderstandings can happen with filers.
“People are losing certain deductions and I think people are focused on what they could be losing,” Brinkman said. “The changes in the tax brackets and the items you are gaining in the new tax law are offset by what you are losing. However, it is different for every situation.”
A Tax Policy Center report said that 62 percent of Californians will see their taxes go down in 2018 with an average tax cut at $2,170, which is below the national average of $2,200. The report said 8.6 percent of Californians will see an increase in their taxes with an average of $2,510, below the national average of $2,760.
Brinkman identified the main tax areas residents should understand and prepare for:
State and Local Tax (SALT). SALT allows filers to deduct up to $10,000 in state, real estate and personal property taxes, such as car registration fees.
“It’s a big misconception that all itemized deductions are maxed out at a $10,000 cap and it’s really only for the SALT,” Brinkman said.
Mortgages. Brinkman said the new tax bill lowered the cap for mortgage interest paid from $1 million to $750,000 of mortgage indebtedness and eliminated the deductibility of home equity debt. However, the interest on home equity debt is not deductible through Dec. 31, 2025.
“If you had a mortgage loan prior to Dec. 15, 2017 and you are under the $1 million of acquisition indebtedness, you can deduct 100 percent of your mortgage interest,” Brinkman said. “You are grandfathered in.”
Medical Expenses. Brinkman said the good news is medical expenses hasn’t changed. Currently, there’s a 7.5 percent threshold remaining for 2018 and anything above 7.5 percent of a person’s adjusted gross income (AGI) will be deductible. In 2019, however, anything above a 10 percent AGI will be deductible.
“If you have medical expenses, it’s a good idea to go ahead and take care of them this year,” Brinkman said.
Charitable Contributions. For 2018, filers can deduct up to 60 percent of a person’s AGI for contributions made to nonprofits and certain foundations. The increase in AGI runs through Dec. 31, 2025.
“The good news is that the maximum increased,” Brinkman said.
Home Office. “It’s a gray area,” Brinkman said. “It’s one of those things IRS tends to look at. Some people tend to get aggressive with it. It’s more acceptable now than in the past if you do it correctly.”
Brinkman said using the home office as a miscellaneous itemized deduction for employees is no longer available. The deduction is still available for those who are self-employed.
Small Businesses. For the first time ever, most small businesses are allowed to take a 20 percent tax deduction.
“Businesses in general have favorable changes regarding their 199A deduction,” Brinkman said.
Standard Deduction. Includes $12,000 for singles (up from $6,350 in 2017), $24,000 for married couples (up from $12,700 in 2017) and $18,000 for heads of households (up from $9,350 in 2017).
“If you don’t itemize, you use the standard deduction, whichever is higher,” Brinkman said. ”The higher standard deduction is going to help a lot of people.”
Miscellaneous Itemized Deductions. Includes tax preparation fees, investment advisor fees and non-reimbursable employee business expenses.
“It used to be subject to a 2 percent limitation, now it’s completely gone,” Brinkman said. “I am encouraging clients who do have significant expenses to talk with their employer to see how they can set-up an accountable plan to get reimbursed.”
Personal Exemptions. Personal exemptions are not just suspended for the 2018 tax season, but through Dec. 31, 2025.
“In exchange for the higher standard deduction, the personal exemptions were suspended,” Brinkman said.
If there’s one piece of advice Brinkman can offer filers, it’s to always begin the tax planning process as soon as possible.
“It’s important more now than ever,” Brinkman said. “Get your taxes done early so that you don’t have any last minute surprises. I think a lot of people will be pleasantly surprised once they have everything complete.”
Residents have until Monday, April 15, 2019 to file their 2018 taxes with the IRS. To view the latest IRS Tax and Earned Income Credit Tables for 2018, visit www.irs.gov/pub/irs-dft/i1040tt–dft.pdf.