It is very important for Americans to know the new development in tax law before they file returns on tax. The most notable set of changes to the U.S. tax code in over 3 decades now is The Tax Cuts and Jobs Act. The new development was implemented last year, and this is the return that you will file at the Inland Revenue Service office in the spring of 2019. Many people who pay tax are already bothered and confused while some are optimistic ever since the United States Congress passed the Tax Cuts and Job Act in December. The major question has been whether it will create a boom or a burst in the economy.
The New Development on the corporate side is not really a bone of contention as it won’t affect your tax return, so the focus will be on the individual filing for tax. This new development, as required by the new tax legislation for a person filing for tax, is set to expire in the year 2025, unless an extension is made. Note, changes made on the corporate side by the bill are permanent.
TAX BRACKETS STILL REMAIN AT SEVEN BUT WITH A LOWERED RATE
Although the number of tax brackets still remained at seven, the rates have been reduced. The only exception is that the minimum tax rate for the poorest Americans stays at 10%. Not only that, income threshold has been increased, with much significance at the upper tax brackets. In short, the higher bracket is now applicable to very few(higher-earning) Americans than it was previously. For instance, the upper tax rate was 39.6% and it applied to couples who are married and are jointly filing for tax with earnings more than $480,050 before the passage. The top rate under the new reform has been reduced to 37% and only applies to a married couple with over $600,000 taxable income earnings.
Annual adjustments applicable to tax brackets, standard deduction, and other provisions on tax had previously been based on the Consumer Price Index for all urban consumers before the 2018 Tax year. In a nutshell, a basket of goods and services that relate to a typical U.S. household was taken into consideration. So, it makes sense in that it progressively increase figures relating to tax over time.
Meanwhile, the new development on tax makes use of a metric called Chained Consumer Price Index. This index assumes that in a situation where a commodity or service is too expensive, a household will switch to buying a cheaper alternative. The consequence is that the index grows at a slower rate slightly above other forms of the Consumer Price Index.
You may see it as a change that may not necessarily have a big effect yearly, but you need to know that Chained CPI increases at a slower pace over time. This alone could affect the inflation adjustments to the tax code in the space of 10 years. The higher tax brackets will start applying to taxpayers in the lower-income range as real inflation (in theory) will rise faster than earnings thresholds of the marginal tax brackets.
Taxpayers can make a choice of using itemized deductions or standard deductions. Itemized deductions simply mean you subtract the addition of all your individual tax deductions which you are entitled from your adjusted gross income (AGI). Your Adjustment income is what you have when a few adjustments are subtracted from your total income. Examples of common adjustment include traditional IRA contributions and student loan interest among others.
Standard deduction, on the other hand, is a set amount that households can choose to subtract instead. Whichever of the methods that you perceived a benefit to you, can be used.
Since most households in the U.S adopt standard deduction, I expect this change to affect millions of people.
While there has been an increase in the standard deduction, the valuable personal exemption is gone. A personal exemption is a particular portion of income that Americans can subtract from their taxable earnings yearly. Previously, they could claim a personal exemption for themselves, their spouse, and each dependent.
For instance, in 2017, a married couple could lay claim to eight personal exemptions. So, the higher standard deduction may necessarily not be entertaining for larger families.
Feel free to read more on the Tax Cuts and Job at on the IRS Website or Find a Tax Preparer.
Key Tax & Financial Services, LLC