Historically, approximately 70% of St. Louisans individual tax returns used the standard deduction, while the other 30% found it more beneficial to itemize. For 2018 and beyond, experts have projected that roughly 95% of individual tax returns now will utilize the standard deduction. What does this mean for St. Louis County, Missouri taxpayers? Are you prepared? What about Trump tax? Here’s the good news!
Which tax breaks stay the same in 2019?
Many tax breaks survived the Tax Cuts and Jobs Act unscathed. This is not an exhaustive list, but here are some tax deductions and credits that weren’t affected at all:
• Capital gains and qualified dividend taxes
• The Child and Dependent Care Credit
• The American Opportunity Credit
• The Lifetime Learning Credit
• The Student Loan Interest deduction
• Tax deductions for retirement savings
• Big changes to the alternative minimum tax
Many legislators had initially sought a repeal of the Alternative Minimum Tax, or AMT, but it still exists in 2018 and beyond. If you aren’t familiar with it, the AMT is designed to ensure that high-income taxpayers pay their fair share of taxes, even if they’re entitled to tons of deductions and credits.
Taxpayers still need to calculate their taxes twice — once under the standard method and again using the AMT — and pay whichever results in a larger bill. Don’t worry, though — your tax-preparation software program will determine if you need to be concerned about the AMT. However, there were a couple of significant changes made by the new tax law.
First, AMT exemptions never were indexed for inflation. This became the main problem with the AMT — because it didn’t change over time with purchasing power, it began to apply to more and more Americans. The AMT never was designed to affect the middle class, but it had started to do just that. From here on out, the AMT exemption amounts will be indexed for inflation.
Second, the AMT exemption amounts themselves, as well as the phase-out limits at which they start to go away, have been increased significantly.
The personal exemption is gone
To be perfectly clear, although the standard deduction has roughly doubled, it doesn’t mean that people are getting double the tax break — far from it.
While the standard deduction has increased, the valuable personal exemption has gone away. The reasoning for this is that, in addition to a tax cut, lawmakers were also attempting to simplify the tax code. So instead of giving taxpayers a standard deduction and several exemptions, these two things were essentially combined into a higher standard deduction.
In plain English, a personal exemption is a certain amount of income Americans can exclude from their taxable income each year. In prior tax years, Americans could claim one personal exemption for themselves, their spouse, and one for each dependent.
In the 2017 tax year, each personal exemption was an effective $4,100 tax deduction. And there was no limit to the number of personal exemptions that could be claimed. For example, a married couple with six dependent children could claim eight personal exemptions. You can see how the higher standard deduction may not exactly be a gift — especially for larger families.
No more Obamacare penalties, starting in 2019
While the Republican administration and Congress have thus far been unsuccessful in repealing the Affordable Care Act, the Tax Cuts and Jobs Act did eliminate the individual mandate — aka the “Obamacare penalty.” This is the penalty you pay for not having health insurance.
One important caveat: The penalty is only repealed in tax years 2019 and beyond. If you didn’t maintain qualifying health coverage throughout 2018, you still may face the penalty when you file your tax return in 2019.
In closing, Capital Advisory Group has been helping business owners with tax liability mitigation and wealth strategy for over 40 years. We’re here to help business owners and entrepreneurs use tax laws to your benefit. We’ll help you to understand how the tax laws work, and how they are designed to reduce your taxes, not to increase your taxes. Once you understand these basic principles, you no longer need to be afraid of the tax laws. They exist to help you and your business—not to hinder you.
I hope you found this piece informative and are able to take away some actionable tactics. Please let me know how I can be a resource for you in any way. I do this all the time and would love to show you exactly how!
Email me or give me a call (636) 394-5524 to schedule your strategy session today! Thank you! You are appreciated!
Jeff Zufall, Capital Advisory Group.