Many of the changes to the tax code from the recently passed Tax Cuts and Jobs Act are taking effect this tax year – which could impact your finances in a big way. Maybe you’ve already noticed a change in your take-home pay, or maybe you’ve heard about how the standard deduction has nearly doubled. The biggest change to the American tax code in 30 years – is to benefit the majority of hardworking Americans.
But which parts of this law can make your taxes go up? Here’s a quick look at how tax reform is affecting parents, workers, and people who pay high property taxes.
While there aren’t a lot of provisions in the tax reform law that will affect taxes for parents and families, there is one major change to the rules about exemptions for children and dependents: If you have two or more children, you could end up paying more income tax due to the loss of exemptions that are not covered by the new, bigger standard deduction amounts. However, you might still benefit from an increase in the Child Tax Credit, as well as the new, $500 Credit for Other Dependents.
The biggest change for workers has to do with Employee Business Expenses – work-related expenses you aren’t reimbursed for, or are only reimbursed for up to a certain limit. Before tax reform, if you chose to itemize deductions, you could deduct unreimbursed expenses related to your job from your taxable income. This meant you could deduct common business expenses, like travel and supplies, to the extent these things exceeded 2% of your Adjusted Gross Income (AGI).
The Tax Cuts and Jobs Act eliminated this rule, along with the ability to itemize other miscellaneous deductions that exceeded the 2% AGI floor. This is a big change for employees who incur business expenses that aren’t reimbursed or are only partially reimbursed, like truck drivers and salespeople, for example. However, it is important to note that the impact of this change might be offset by the new, almost-doubled standard deduction, which it’s likely many more American workers will now claim.
It’s also worth noting that if you live in a state with unusually high income or property taxes – like New Jersey, New York, or California, for example – and you paid more than $10,000 in these types of taxes last tax year, your taxes may increase due to the new $10,000 limit on how much you can deduct from your taxable income after aggregating what you’ve paid in state and local income taxes, real estate taxes, and property taxes.
Outside of tax reform, there are some other key reasons your taxes might increase:
If you’ve changed jobs or careers, and you’ve gone from being an employee with a W-2 to a contractor, freelancer, small business owner, or another type of self-employed worker – well, first off, congratulations! Unfortunately, though, because you’re working for yourself, you’ll have to pay self-employment taxes, meaning you’ll have to cover all the Social Security and Medicare taxes on your income, instead of just half, as you would were you a W-2 employee.
If you’ve won a monetary prize of some kind, you’ll likely be taxed on that at a high rate. For example, if you’ve, say, won the lottery, it’s a safe bet your winnings won’t have enough withheld from them for taxes, and you’ll owe the government come tax time.
If you’ve withdrawn money from your retirement plan or IRA before you’re 59 ½ years old, chances are you’ll have to pay income tax on that money, as well as an additional penalty of 10% for withdrawing the money early.
If you’ve had a child graduate and move out on their own they are generally no longer a dependent. Even though there are no longer any exemption deductions, you also won’t be able to claim the new credit for other dependents.
With the 2017 tax season past us, now’s the time to get up to date with all the changes to the tax code – along with the existing rules – that could end up costing you money in the future. By noting these rules and changes, you can begin to get an idea of what your next tax return might look like, and you can prepare accordingly.