By Kimberly Bennett
Last Friday, during the monthly Prime Timers: Lunch & Learn at O’Fallon First United Methodist Church, Craig Northrup, AARP volunteer tax preparer, spent the session informing the senior citizens of the church about the impact of important changes in the 2018 tax law. Craig Northrup has been a volunteer with the local AARP branch for five years, helping clients prepare their taxes. Through his experience, he realized that many people do not understand or appreciate what’s going on with the new tax law and wanted to share his research with the patriarch of the congregation to prepare them for the new changes that have taken place.
“The impact of the law,” he began, “is that you’re going to pay less in taxes this year in 2018 than you did in 2017 if your income is relatively the same. The changes you need to know about for this tax season is that the standard deduction is going away because the IRS estimates that the number of people who will now have to do the Schedule A (which is where you itemize your contributions, your interest paid, taxes paid and medical expenses) will go from about 30%$ of the tax returns they process to about 5% instead. So approximately 1 out of 20 tax payers in the country is even going to itemize.”
The good thing, Northrup further explains, is this elimination has made it a lot simpler for both the preparers and the tax payers to understand taxes. However, the real savings people are going to see on their taxes didn’t come from the change in the standard deduction.
The savings people are going to see came from the change in the marginal tax rates, which is the real impact in 2018 taxes. “When you go into a tax book,” he continued, “there’s like 12 or 13 pages in the back where you would enter your income amount before reading across to see if you’re married, filing jointly. There’s also that number that always tells you how much tax you owe. Meaning, the underlining calculations that were used to figure out what you owe in taxes have changed.”
Other tax changes affect small business owners. According to the latest tax law, small business folks received some very advantageous tax laws. For example, one of the things that has been eliminated for small businesses is that they can no longer claim entertainment expenses.
“In the past, businesspeople would take clients out, buy them lunch and give them tickets to events like the Cardinals’ Baseball game, but due to the IRS getting rid of the entertainment write-off for small businesses, special things like that won’t happen anymore.” said Northrup.
Another important note is that unlike the future 2019 tax law, the Affordable Care Act (ACA) is still in effect for 2018 taxes. If you did not have health care insurance for 2018, you’re going to pay at least $695.00 per person as a penalty just as you have been doing for the past four years.
“The percentage of people,” added Northrup, “uninsured in the country has gone from about 10% to about 18% in the past 12 months just because people opted out of paying health insurance premiums before the year was over. However, if for whatever reason, someone has been kicked off their health insurance after the 10-month mark, the preparer is authorized by the IRS to provide health care waivers for those kinds of situations. Just to let you know, having insurance up to 10 months will count as a full year of insurance.”
Moreover, to explain marginal tax rates, Northrup presents a step-wise linear function graph, describing the relationship between tax rates and income. In the graph below, blue indicates 2017, and the orange highlights 2018. In 2017, the seven marginal tax brackets were: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, while in 2018, the tax brackets shifted to: 10%, 12%, 22%, 24%, 32%, 35% and 37%, making the 2018 line always lower than 2017.
The savings in your taxes, according to Northrup, are found within the space between the lines.
As you can see in the graph, the phase points from year to year have changed as well. In this chart, he explains the tax rate change for married individuals who are filing joint returns, but the taxable income will be different for unmarried individuals and heads of households.
Here is a table found on the IRS website to help explain the graph above:
As noted in the graph and table, in Phase Point #1 of 2018, $0 to $19,050.00 has a 10% tax rate. In Phase Point #2, taxable income between $19,051.00 and $77,400.00 will increase to a 12% tax rate. The highest Phase Point for a married individual filing jointly has a tax rate of 37% with an income of $600,001 or more. If you’re a retiree and you keep your income below $77,400.00, then your taxes will be minimized.
“If you earn more than the phase point – for instance – if you earn $77,401.00, you get $1.00 taxed at 22%. Everything before that is taxed at either $10% or 12%. That’s the impact of the marginal tax rate.” Northrup explained.
Aside from the difference in the marginal tax rates, the personal exemption of the new tax law has been eliminated. “That is not a benefit,” Northrup stated. “It actually hurts the tax payer. However, the standard deduction has been raised compared to last year. For example, in 2017, for a single person under 65, their standard deduction was $6,350.00. In 2018, it increased to $12,000.00.”
Northrup explains that the Standard Deduction is what came off the Schedule A, where people would enter their contributions, medical expenses, paid taxes and paid interest. One of the changes about the Standard Deduction is on the taxes you paid. On the Schedule A form, Letter E asks people to enter the smaller of $10,000 or $5,000. So, if one is married or single, the most he or she can claim in sale tax and property tax is $10,000. If married but filing separately, he or she can only claim $5,000.
There was a lot of information about the changes in the new tax law for 2018 taxes that Northrup covered during the Prime Timers: Lunch & Learn last Friday. The major ones were mentioned above, but minor changes which may or may not affect your taxes is best addressed through a private appointment with your CPA or tax preparer.
If you would like to contact the AARP office to answer any of your questions and / or have your taxes prepared for the 2018 Tax Return, please call the local AARP office (located at the O’Fallon Library) at 632-3783, and they will gladly assist you with your questions and your returns.
**Note: The examples in this article may not apply to everybody. While the changes to the new tax law are in effect for everyone, figures like taxable incomes and standard deductions vary within age, family status and other various factors.