Tax Reform for Familiestax tips | November 23, 2018 | By Susannah McQuitty
It’s high time to double-check how tax reform will affect you and your family, whether you want to estimate your refund with tax reform in mind, read up on the most significant Tax Cuts and Jobs Act changes, or review reform-related frequently asked questions.
Families in particular are going to see some big changes, so let’s review how the new tax law will impact your tax situation.
Goodbye, personal exemption—hello, new standard deduction
With tax reform, the personal exemption has been repealed in favor of raising the standard deduction amount, which is now almost doubled. The standard deduction reduces your taxable income but only applies to each filer, not each person in the household.
This may seem like a downside for parents with several children, but for many, the tax breaks will still even out between the standard deduction and the Child Tax Credit.
“But wait,” you may be wondering. “I usually itemize deductions—how does the new standard deduction help me, then?”
Taxpayers can still itemize deductions, but since the new standard deduction is so high, many won’t have to. If you make mortgage payments, give to charity, have a lot of out-of-pocket medical expenses, or have high state and local taxes, you’ll still want to figure your itemized deductions to see if the total is higher than the standard; but many who have itemized in the past will notice that their standard deduction is now higher than their itemized total on Schedule A.
Child Tax Credit
Not only do you have the new standard deduction to help boost your savings, but the Child Tax Credit (CTC) amount has been raised as well to help balance out the repealed personal exemptions.
The credit amount per child is doubling from $1,000 to $2,000, and $1,400 of that amount will be refundable (meaning that, if your tax liability is reduced to zero, you could still get up to $1,400 in refund money).
You can even get a small credit amount for dependents who aren’t children, such as parents, siblings, or foster children. Many dependents who don’t qualify for the primary CTC will now qualify for the Credit for Other Dependents—a temporary $500 nonrefundable credit.
The phaseout amounts for the Child Tax Credit and Credit for Other Dependents have been increased substantially from 2017 levels, making more families eligible to claim the credits. Married taxpayers filing jointly with an AGI up to $400,000 and all other taxpayers with an AGI up to $200,000 will now qualify for the credit, compared to prior levels of $110,000 and $75,000, respectively.
Here’s a heads-up about divorces in 2019 and beyond: Alimony payments will not be deductible, and the recipient won’t be taxed on those amounts, which is a significant change from the current tax law (and an expensive one for those paying alimony).
These changes also apply to divorce instruments modified after December 31, 2018, if the modification specifically states that it will implement the Tax Cuts and Jobs Act treatment of alimony payments.
Divorces during or before 2018 will be treated under the old law—alimony payments can be deducted by the payer and the recipient is taxed on that amount. To deduct alimony payments under the old law, the payments must meet these criteria:
- The payment is by cash, check, or money order.
- You and your spouse don’t live in the same home.
- You don’t count payments made after your ex dies or remarries, since you’re not obligated to pay those.
- The payment is not for child support.
If you receive alimony under the old law, you must report the payments as income on your taxes, and you must give your ex-spouse your SSN in order to properly deduct the payments.
Section 529 plans
A section 529 plan (or Qualified Tuition Plan) is an education savings plan operated either by an educational institution or by the state itself.
The new federal law allows distributions from a 529 plan to be used for qualifying K-12 public, private or religious education expenses. Homeschool-related expenses may also be payable with 529 distributions.
While there’s no annual distribution limit on qualified post-secondary education expenses, distributions for K-12 expenses are capped at $10,000 per year per beneficiary. Be sure to double check with your state to make sure that K-12 education expenses qualify for section 529 distributions, too; the federal law allows it, but each state must elect to allow those distributions as well.
Qualifying expenses include:
- Curricular courses and materials
- Books or other instructional materials
- Online educational materials
- Tutoring or educational classes outside of the home (provided the instructor is not a relative of the student)
- Dual enrollment in an institution of higher education
- Educational therapies for students with disabilities
The Tax Cuts and Jobs Act also affected items such as medical expense deductions, moving expense reimbursements, and vehicle depreciation. If you’d like to learn how other changes might affect you, check out our Tax Reform 101 page in the Tax Guide and estimate how tax reform will affect you with our tax estimator app.