A Republican-led Congress just made the biggest changes to the U.S. tax system in over 30 years with the passing of a new tax bill. With this and every other thing that comes out of Washington these days, the knee-jerk reaction is to turn to politically-charged arguments over decisions our representatives have made.
But with such a huge change, it’s more important right now to understand exactly how these changes affect you and your tax situation. Because whether you like the new tax bill or hate it, it’s your responsibility to pay as little tax as legally possible.
How the Republican tax bill impacts Mormons
With a propensity to donate money to our church and a call to multiply and replenish the earth, some Mormon families may get hit hard with the new tax bill. Here’s a breakdown of the changes that could affect you.
Standard deduction increase
The new bill doubles the standard deduction from $6,500 for single filers and $13,000 for married couples filing jointly to $12,000 and $24,000, respectively. This means that if you’ve itemized your deductions in the past using tithing contributions and medical expenses as your main deductions, you may not be able to do that anymore.
Personal exemptions gone
But if you’re getting a higher standard deduction anyway, it shouldn’t matter if you can no longer itemize, right? Well, now that depends on how big your family is. Under the previous tax law, you’d get a personal exemption worth $4,050 for you, your spouse, and every one of your dependents — that exemption lowers your taxable income.
So, if you have a family of seven, that means you would get to deduct $28,350 from your taxable income.
The new tax bill eliminates the personal exemption, however. So big families could lose out big time, even with a higher standard deduction amount.
Child tax credit increase
In an attempt to neutralize slashing the personal exemption, at least in part, Congress increased the child tax credit from $1,000 to $2,000. Note that while a deduction or exemption simply lowers your taxable income — which is the number the IRS uses to determine how much tax you owe — a credit is a dollar-for-dollar reduction of what you actually owe.
So, on the surface, doubling the child tax credit sounds great.
But if you regularly get a tax refund, you’ll actually only get up to $1,400 back per child, whereas previously the full $1,000 was refundable.
It’s still an increase, but it mostly benefits taxpayers who don’t get a refund.
That said, tax laws used to start phasing out the child tax credit for couples making more than $110,000 per year, and now that threshold is $400,000.
529 plans expanded
If your kids go to a private school or you plan to send them to one, you can now save for those educations costs on a tax-free basis.
529 plans work like this: You contribute money for future education expenses and can deduct those contributions from your taxable income. Those contributions grow tax free, and withdrawals are also tax free if you use them for qualifying education expenses. (Non-education expenses get hit with taxes and a penalty, so avoid that).
What’s more, Utah and other states offer extra state tax benefits to people who contribute to 529 plans.
529 plans were previously meant for college education costs only, but the new tax bill now includes K-12 private school tuition.
Some business income deductible
And with what I’ve seen as an entrepreneurial spirit among members of the church as a whole, I bet that there are hundreds of thousands of other small businesses run by Mormons throughout the country.
If you’re one of them, the new tax bill could mean a huge tax cut for you. That’s because all businesses with pass-through income — so, sole proprietorships, partnerships, LLCs, and S-corporations — can deduct 20% of their business income when they file taxes.
Personally, this is a huge break for me and my freelance writing business.
Individual mandate eliminated
The Affordable Care Act, better known as Obamacare, required that people have health insurance. For those who chose not to because they couldn’t afford it, they had to pay a penalty, which could be pricey if you have a lot of kids.
With the new tax bill, this individual mandate will no longer be in force starting in 2019.
How will it affect you? It depends
The new tax bill is neither all positive nor all negative. While it looks like it hurts larger families, it could help those who have a large family and a business.
And remember, these changes don’t go into effect for the current tax year. You’ll still file your taxes at the beginning of 2018 as you have been. But for the 2018 tax year and beyond, these changes will apply.