I admit it. When I hear the word, taxes my eyes kind of glaze over and I feel a bit anxious. I can’t help it—I was never a numbers person and filing my taxes is overwhelming.
But as we cruise into 2018, my husband and I recently had “the talk” with our accountant. That's because our second daughter, Aimee, was born in 2017, and with the new Tax Cuts and Jobs Act that President Trump signed in December, we need to know how we, as a family of four, will be affected. (My husband works in banking, and I’m a freelance writer.)
No doubt if you have kids, or you're planning to have kids this year, you're wondering how the tax reform could affect you, too.
Here’s what American families should know about the tax reform, and filing in general:
Exemptions and Deductions
First, the personal exemption has been eliminated. For 2017, the personal exemption is $4,050. That will apply to your 2017 taxes, but not to your 2018 taxes, which you'll file next year.
While people will lose the personal deduction, the standard deduction doubles, so it's an extra $6,000, plus the tax brackets have been lowered for most people.
“Tax brackets have been adjusted, and the standard deduction will be doubled, which means more money in the weekly or bi-weekly paycheck for most Americans, and potentially a larger refund,” explains tax and financial expert Abby Eisenkraft, who helped me better understand the tax changes.
It will depend on each family's situation to determine whether the new tax rules will leave them up or down. In theory, a family of four who loses the $16,200 individual deduction still has the $24,000 standard deduction, plus a a $2,000 tax credit for each child, for example.
The Child Tax Credit
Yup, you read that right. The child tax credit doubles from $1,000 to $2,000, which puts a lot more money in people's pockets. Basically, if you have children, you now owe the government less money. If you’re expecting a baby this year, you'll get a child tax credit of $2,000.
A major perk of the new tax act is that families can now use funds in their 529 plan for pre-college expenses, including private school and religious school. Eisenkraft explains it’s now a tax-free distribution of up to $10,000 per child, per year, for expenses from grammar school up through college. Before, it was only for college expenses.
That means it's now financially easier for some families to send their kids to private school. Also, families have more freedom since they can use this money for any educational expenses. If your kids go to public school, for example, you can use the 529 funds for something like tutoring or for extra-curricular activities.
Start putting money into a 529 plan immediately, advises Eisenkraft, so the 2018 child will have money for school. Note that in certain states, it's a deduction on the state return (i.e., NY). That family can also claim dependent care expenses, which allow both parents to work.
You might assume getting a tax refund is a good thing, but if you adjust your allowances, you could get that money in your paycheck all year, says Eisenkraft. “Whether you get it at tax time or during the year – it's the same money we're talking about.”
It’s easy to think a refund is something you deserve, but hold up. The truth is, the “sweet spot,” says Eisenkraft, is not a big refund or paying a huge tax bill. “Because if you get a large refund, that means it was money you could have had access to during the year.”
Even if you do your own taxes, consider meeting with a financial expert to get some advice about money-saving tax moves for now and the future.
Personally, for 2018, Eisenkraft advised my family to make sure we pay enough in taxes throughout the year in order to avoid any penalties. “You shouldn't be seeking a refund check at all since you are self-employed, and you have self-employment and ordinary income taxes to pay,” she told me.
She also advised us to max out a SEP IRA (a retirement plan that you can set up as a self-employed person; it's based on the profitability of your business) since I don't have a 401k.
My husband and I are getting all our tax forms together already (I mostly run on 1099s) so we’re ready to file before April 15, and you should, too. Good luck!