Tax season is rarely without challenges.
But this is the first year that taxpayers are filing under the Tax Cuts and Jobs Act of 2017, considered the biggest revamp of the tax code in 30 years. These changes may cause many Americans to drastically rethink their financial strategies, if surprises for some taxpayers are any indication. Understanding the nuances of the new tax law now can help you better prepare to make sound financial decisions in the future.
Below are some of the biggest changes to the tax code for 2018—which you’ll use to file your taxes this spring—followed by a few ways to reinvest your refund should you get one.
- Amounts taxed for each income bracket. The seven tax income brackets changed from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% in 2017 to 10%, 12%, 22%, 24%, 32%, 35% and 37% for the 2018 tax year. The amount each bracket is taxed also was modified. For example, an individual who falls in the 22% bracket would pay $4,543 plus 22% of his or her taxable income between $38,701 and $82,500 in taxes (compared to $5,226 plus 25% of taxable income between $37,951 and $91,900 the year before).
- Elimination of personal exemptions. With the personal exemption eliminated, taxpayers no longer can claim $4,050 per person the way they did in tax year 2017. These exemptions helped reduce your taxable income, which often paved the way to a refund.
- Standard deduction amounts. At the same time, standard deduction amounts have been given a boost. The standard deduction for 2018 is $12,000 for individuals, $18,000 for heads of household, and $24,000 for married couples filing jointly and surviving spouses. (In 2017, those figures were $6,350, $9,350, and $12,700, respectively) These deductions also helped reduce your taxable income.
Various other deductions, tax credits, and contributions to retirement accounts were also among items affected by the new tax law. Forbes provides a breakdown of all of the changes, along with numbers you’ll need for crunching. (If you’ve already finished your 2018 taxes, these charts showing the 2019 changes will give you a head start for the next filing season.)
If you’re fortunate to come out the other end with a large refund, there are ways to enjoy it that don’t involve a purchase that immediately depreciates in value. Here are a few ideas:
- Sock it away. Of the many savings plans out there, certificates offer one of the easiest (and safest) ways to “set it and forget it.” Say you get $3,000 back from Uncle Sam. If you purchased a seven-year certificate at SELCO’s current guaranteed fixed rate of 3.15% APY and added your dividends back into your certificate balance, you would earn $740 after seven years.
- Jump-start your retirement. You’ve heard it time and again: Saving now will go a long way later. By depositing your tax refund directly into an individual retirement account (IRA), the money will grow over time while allowing you to contribute at your own pace. There are also likely tax advantages to using an IRA. SELCO’s CFS advisors can help you decide which option is best for your needs.
- Spruce up your home. Have your home-improvement projects failed to reach the “project” phase? Your tax refund could be the push you need to build equity in your home. This extra money could work in tandem with a home equity line of credit, or you could combine your refund with a HELOC to pay off your high-rate credit cards.
Looking for other ways to use your refund wisely? Try these savvy methods on for size.
Now that the first post-Tax Cuts and Jobs Act filing season is nearly in the books, hopefully you can avoid a “Wait, I owe the IRS?” moment in the future. If something in the new tax law just doesn’t compute, be sure to consult an experienced tax professional.