Tara J. Barboza: Don't be surprised by tax reform changes
NORTH ADAMS — This is the first tax year affected by tax reform legislation that was passed at the end of 2017. Many rules have changed that could affect your business and personal taxes. Don't be surprised come April 15! Educate yourself on the major changes to the tax code before filing your return.
1. Increased standard deduction: The standard deduction has significantly increased — $12,000 for single, $24,000 for joint filers and $18,000 for head of household. This is a major increase, close to double over last tax year. For some, this will simplify the tax filing process because the higher standard deduction will exceed the value of itemized deductions for many taxpayers. But CPAs suggest you do the calculations on your deductions to see if the standard or your itemized deductions is higher.
2. Elimination of deductions: Through tax reform, Congress limited the deductibility of state and local taxes to $10,000 and eliminated all miscellaneous itemized deductions, such as employee business expenses, costs associated with a job search, professional and union dues, and investment expenses. This is why more people will choose the standard deduction this year than itemize.
3. Changes to 1040 tax form: This year's federal individual income tax return, simply known as form 1040, has a noteworthy new look. Taxpayers have been using form 1040 to prepare and file their income taxes since 1913 and this year's change is arguably the most significant in its history. Not all taxpayers will find this year's shorter form simpler to complete. More than 50 lines of information have been eliminated on this new 1040 but it's still tricky to navigate. The form is smaller and has almost shrunk down to the size of a postcard. Now all 150 million individual taxpayers will be using the same form. Those easier forms 1040A and 1040EZ have been discontinued.
4. Reports of smaller refunds: There have been multiple reports of taxpayers receiving smaller tax refunds early on this season. CPAs say that when the IRS changed the withholding tables in conjunction with tax reform, taxpayers were getting a little more in their paychecks each week, leaving less for a tax refund. This will not be the case for everyone, each person has a unique financial situation but it would be wise to refrain from spending your tax refund before you receive it.
5. Big differences between state and federal: Your state tax return and your federal tax return are governed by different rules. Some of the changes made by tax reform do not apply to your Massachusetts return. Generally, Massachusetts does not adopt any federal tax law changes after January 1, 2005. However, certain specific state provisions do automatically conform to current law. The biggest differences between the two are related to alimony, moving expenses, and paying a penalty for not obtaining health care coverage.
6. Charitable giving: Because of the increase in the standard deduction, most people will not be able to receive any tax benefit for their charitable donations on their tax return this year. To make an impact on both your chosen charity and your tax obligations, consider bunching your donations into larger amounts given every other year. This may increase the likelihood of being able to itemize deductions in alternate years, plus the charity will get valuable funding that can be allotted over two fiscal years. It's too late now to apply to your 2018 tax return but keep this in mind throughout 2019 to possibly benefit your return next year.
This tax season is shaping up to be quite difficult for many taxpayers. Be sure to read up on the changes to the tax code that apply to your financial situation or reach out to a professional for help.
Tara J. Barboza is an assistant professor of accounting at the Massachusetts College of Liberal Arts and a member of the Mass. Society of CPAs.
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