Lower Tax Brackets = Higher Taxes?

The recent tax law changes have lowered the tax brackets starting in 2018, but that does not necessarily mean lower taxes. This is due to the elimination or reduction of items that are no longer deductible. Deductions that have disappeared include, but are not limited to:

Personal exemptions: This will have the most impact on taxpayers who claim their adult children or parents. However, this may be offset somewhat by a partial credit.

Miscellaneous deductions: Sales people who have to incur out of pocket expenses or who use a home office will be greatly affected.

State and local taxes: The deduction is now limited to $10,000 for property taxes and state income taxes. This mostly impacts us here in North Jersey because we have such high property and income taxes. However, many taxpayers in this area are subject to the Alternative Minimum Tax (AMT), so their deductions would normally have been limited anyway.

Mortgage interest and home equity loans: No deduction for home equity loans, and a lower threshold of $750,000 for new mortgages.

The list goes on and on, but includes either limitations or eliminations of moving expenses, alimony payments (for divorces after 2018), entertainment deductions, like-kind exchanges, business losses, etc.

On the plus side the child tax credit has been increased to $2,000, along with the thresholds to claim this credit. Also, the standard deduction has almost doubled. Every situation is different and must be looked at on a case by case basis.

What’s Your New Tax Bracket?

The recent tax laws have not only changed the income tax rates, but have also expanded the income that falls within each bracket. Here’s an example of the old rates vs. the new rates for married individuals filing a joint return:

Old Brackets:

Rate                       Taxable Income

10%                        $0 – $19,050

15%                        $19,051 – $77,400

25%                        $77,401 – $156,150

28%                        $156,151 – $237,950

33%                        $237,951 – $424,950

35%                        $424,951 – $480,050

39.6%                    $480,051 +


New Brackets:

Rate                       Taxable Income

10%                        $0 – $19,050

12%                        $19,051 – $77,400

22%                        $77,401 – $165,000

24%                        $165,001 – $315,000

32%                        $315,001 – $400,000

35%                        $400,001 – $600,000

37%                        $600,001 +


There are other numerous changes that will impact your overall tax liability, including but not limited to the suspension of personal exemptions, expansion of the standard deduction, itemized deduction limitations (especially for state and local taxes), and lastly, the change to corporate tax rates.

Did You Get a Surprise After Filing Your Return?

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Everyone loves to receive a much larger than anticipated tax refund, but what if you unexpectedly had to pay when you filed this year? There could be several reasons why, but it’s not too late to fix it for 2015, including:

Your filing status or dependents may have changed, perhaps from married to single, which usually causes you to pay more income taxes. Maybe you cannot claim your children as dependents anymore. For 2015, each exemption decreased your taxable income by $4,000.

Your business did very well and additional taxes were not paid. If you are self-employed, not only will you owe income taxes on each dollar of earnings, but you may be subject to self-employment tax, which is an additional 15.3%.

Taxable income has increased and certain deductions and credits have been phased-out. Once your income goes beyond certain thresholds, many tax credits, such as the child tax credit and education credits, are reduced. Real estate losses may also become reduced or eliminated as well.

To prevent a negative surprise for 2015’s tax return, check your current withholdings to make sure that enough taxes are being withheld each paycheck. If you need to increase your withholdings, simply print out form w-4 from www.irs.gov or ask your employer and submit it to them with the additional amount you would like withheld. Any amount can be specified, such as $100. If you need help estimating, please contact our office.

Children and Tax Benefits

With the upcoming birth of our son or daughter, I thought it would be appropriate to write about the tax benefits of raising children. The rules can get tricky, and your children must meet certain criteria to become your qualifying children for tax purposes. Here are a few highlights:

Dependency Exemption: For each qualifying dependent child, you can exempt from your income $4,000.

Child Tax Credit: For each qualifying child under 17 years of age you can receive a credit of up to $1,000 per child. The credit phases-out after your modified adjusted gross income is greater than $110,000 for filing jointly and $75,000 for filing as single or head of household.

Child Care Credit: If you pay for daycare, after-care or preschool so that you can work, you may be eligible for a credit of 20% to 35% of the cost, up to a maximum of $3,000 of qualified expenses for one child and $6,000 for two or more. Your children must be under age 13 to qualify.

Education Credits: There are several credits and deductions available for education expenses:

– The American Opportunity Credit provides a credit of up to $2,500 per eligible student for the first four years of college (100% of the first $2,000 of expenses and 25% of the next $2,000).

– The Lifetime Learning Credit provides a credit of up to $2,000 for an unlimited number of years (20% of the first $10,000 of expenses).

– The tuition and fees deduction provides a deduction of up to $4,000 as an adjustment to income (this means that you do not have to itemize).

– Student loan interest deduction allows for a deduction of up to $2,500 as an adjustment to income.

There are income limitations for each credit and deduction which vary widely based upon your modified adjusted gross income and filing status.

Income Shifting: If you are self-employed, you may be able to hire your minor children, pay them wages, and not have to pay income taxes or payroll taxes. Even if you do not own a business you may still be able to shift investment income to your children to minimize taxes. It takes a lot of planning, but strategizing can save a lot of taxes.

These are just some of the tax benefits to having children. Hopefully this will help to offset some of the cost of raising a family.