Confused about how the new tax law will affect you? You’re not alone.
With the ink barely dry on a new tax law, uncertainty abounds on what moves to make or even what to ask a tax preparer. So what do you need to know before you collect that box of receipts and make the trip to see your accountant?
Here’s a rundown of the important things to note this tax season, including what the new tax law will (and will not) mean for you:
CHANGE HAS NOT COME QUITE YET.
Many people may assume that with the December passage of the tax reform bill, the changes are taking effect with the forms they’re filing out over the next few months, said David Marzahl, president of the Center for Economic Progress, a Chicago nonprofit which provides free tax services for low-income individuals and families. But the 500-page law mostly affects taxes starting in 2018, not what’s owed for 2017.
“People need to move very cautiously as they prepare their 2017 tax returns and not be swayed by all the messaging,” Marzahl said.
Marzahl recommends that filers think about their 2017 returns and the tax reform changes in two separate steps: First, file your taxes with deductions you took last year, as long as nothing major has changed, like a marriage or a new baby. Once that’s done, he said, ask your tax preparer about what you can adjust to be fully prepared for the changes to come.
While there were a few things that taxpayers could do before 2017 ended to maximize deductions, like pay estimated property taxes for 2018 and increase charitable donations, there is one adjustment that some people can still take advantage of: a retroactive lowering of the threshold for medical bill deductions. For 2017, if you paid more than 7.5 percent of your income in medical bills, you can deduct those from your taxes. That’s down from a previous threshold of 10 percent.
For most individuals, the most important thing will be to ensure your withholding is correct.
“For your general W-2 wage earner, your world hasn’t changed a whole lot,” said Mitchell Goldberg, a partner and tax attorney at the Florida-based law firm Berger Singerman.
For small-business owners, preparation for the changes will be more complicated, and will depend on some information that has yet to be clearly defined. For example, the Treasury Department has said that some service companies, like law offices and accounting firms, won’t be able to take advantage of sizable tax-rate reductions for so-called pass-through businesses like limited liability companies, where individual owners pay taxes for the business on their personal tax returns. But the definition of a service business hasn’t been clearly spelled out — something that’s expected to come later this year.
“Unfortunately, there are a lot of question marks as far as what qualifies and how to qualify for it,” Goldberg said. “There are a lot of folks who are going to try to shoehorn themselves into that category.”
YOU’LL (PROBABLY) GET A BIGGER PAYCHECK.
Here’s a bright spot coming soon: Most Americans — about 90 percent — will see a little bump in their paychecks starting next month, according to the U.S. Treasury. And more money is always good, right? Maybe not for long.
The salary increases will be the result of adjustments in the IRS withholding table, which is what employers use to determine how much to take out of employees’ paychecks. Many employers will adjust their employees’ withholding automatically under the new law, experts say. But Manuel Pravia, a principal at the Florida accounting firm MBAF, recommends that taxpayers ensure their withholding is correct so they don’t get a shock come tax time next year. If you are put into a withholding category that leaves you with extra money in your paycheck, it could mean that you’ll wind up owing the IRS. The withholding table for 2018 is not yet available, but will be posted on irs.gov.
“Everybody has to be mindful — it’s a change, and somebody’s going to be caught unaware,” Pravia said. “If you get less withheld for the next 11 months, you may have an unpleasant surprise in 2019. That’s the No. 1 thing that’s going to impact a big portion of the population.”
REFUNDS WILL BE SLOWER.
Expect a refund this year? You’ll need an extra dose of patience.
All the changes in tax law — combined with a short-staffed Internal Revenue Service — have the government running a bit slower this year, Marzahl said. That may delay many federal refunds filed via standard mail this year.
The delay won’t rise past a minor annoyance for most Americans, but it could be a significant burden for low-wage earners who count on federal refunds to cover rent and other critical bills, Marzahl said.
Electronic filers should not be affected by the delay.
WATCH OUT FOR ‘SPEEDY’ REFUNDS AND OTHER SCAMS.
Because of the slowdown in refund distributions this year, the Center for Economic Progress expects there may be more demand for short-term refund anticipation loans.
But Marzahl calls those loans “fairly predatory and high cost,” and recommends taxpayers avoid them. Also, if an outside company claims it can get your refund faster, it’s likely a scam, he said.
And don’t trust anyone who calls claiming to be with the IRS; the federal government doesn’t reach out to taxpayers by phone. The only way the IRS will reach out is through traditional mail, Marzahl said, so don’t fall for someone claiming to be legitimate who uses phone or email to reach you.
SOME MANDATES AND CREDITS ARE UNCHANGED FOR NOW.
The tax reform law also repealed the Affordable Care Act mandate that required all Americans to have health insurance or pay a penalty. But it didn’t go away immediately. If you didn’t have health insurance last year, and you don’t claim a waiver or exemption, you’ll still need to pay a penalty. The individual mandate doesn’t get phased out until Dec. 31 2018, so the same rules will be in place when you file next year too.
It’s a similar situation for the child tax credit.
New rules about requiring Social Security numbers do not take effect on 2017 returns.
CHANGES MAY BE TEMPORARY.
Many of the benefits for individual taxpayers under the new law have an expiration date. Unless Congress acts to extend them, some of the tax cuts for individuals will expire in 2026.
“Everybody’s scrambling to understand, and then in eight years we’ll try to remember what we did before,” Pravia said.
(Article written by Samantha Bomkamp)