Back in December 2017, Congress passed the Tax Cuts and Jobs Act. It had very little impact on tax filings prepared for that calendar year. However, the law did feature changes and provisions that will impact most taxpayers for income earned in 2018 and beyond.

With the new year quickly approaching, it's time to start thinking about tax season. Sure, you still have several months until the deadline. But a little extra preparation now could make a big difference come April.

Here is an overview of the main changes in the new tax law, including h0w they may impact your personal and business finances.

What will you itemize?

A key component of the new tax law is its increase in the standard deduction. Beginning this year:

  • Single filers may deduct $12,000 (compared to $6,500 in 2017).
  • Married filers may deduct $24,000 (compared to $13,000 in 2017).

Given this change, it’s estimated that less than 10 percent of taxpayers will have enough deductions to itemize. This includes things like:

  • Student loan interest.
  • Mortgage interest.
  • Charitable gifts.
  • Property taxes.

Prior to the Tax Cuts and Jobs Act, about 30 percent of tax filers itemized. Taxpayers who do itemize will notice changes when they file their 2018 returns:

  • The new law eliminates deductions for alimony payments.
  • The new law eliminates personal and dependent exemptions, which allowed a taxpayer to reduce taxable income by about $4,000 each for themselves and all dependents.
  • It also disallows a deduction for moving expenses, except for taxpayers serving in the military who have to move based on military orders.
  • In addition, a deduction for educational tuition and fees expired under previous law and was not renewed in the new tax act.
  • But you can still deduct student loan interest, up to $2,500.

How will it affect your mortgage?

One of the biggest changes in the tax law is mortgage interest deduction. The new law:

  • Reduces the limit on deductible mortgage debt from $1 million to $750,000 for new loans taken out after December 14, 2017. This also applies to second homes.
  • Eliminates the ability to deduct mortgage interest on a home equity loan if the funds are not used to substantially improve the home. For example, if you take out a home equity loan to pay down credit card debt, you will not be able to deduct the interest payments starting this year.

Real estate watchers are concerned that these changes, combined with the increase in the standard deduction, minimizes the tax incentives of home ownership to the point where it may keep some people from buying a home. This would create less demand, which could restrain home values.

Did your tax bracket change?

One of the hallmarks of the new law is its adjustment to IRS tax brackets. With the exception of the lowest two brackets, individual tax rates decreased across the board. The income range covered by tax brackets has shifted as well.

For example, previous tax law included a 25% tax bracket that applied to taxable income between $77,400 and $156,150. The new law has a 22% bracket for income between $77,400 and $165,000.

The highest bracket under the old law was 39.6%, which applied to taxable income at or above $480,050. The new law’s highest bracket is 37% for income at or above $600,000.

How much you save on income taxes --- if at all --- will depend on your income and filing status. Here are two examples of a physician with taxable income of $250,000 (with all deductions taken into account).

Under the 2017 law with its brackets, a physician filing as single with $250,000 in taxable income would have paid about $67,570 in federal income taxes. Under the new tax law with amended brackets, the same physician would owe $63,200 in taxes in 2018. (You would save over $2,300!)

The savings are even greater for a physician with a joint tax return totaling $250,000 in taxable income. In 2017, this taxpayer would owe roughly $57,200. In 2018, the tax obligation drops to $48,580 ---  saving you nearly $9,000, or 15 percent.

Are you withholding enough from your paychecks?

The General Accounting Office (GAO) is warning that close to 32 million taxpayers will actually owe on their taxes in 2019.

Why? Given the changes to tax rates and deductions, the GAO discovered that taxpayers are likely not withholding the proper amounts from their paychecks.

Generally, employers are required to withhold income taxes on employee pay. In response to the new tax law, the IRS published new withholding tables for employers and a new form W-4.

Employees can exclude part of their pay from withholding. Typically, this means completing a form W-4 that helps employers determine how much federal tax to withhold from a employee’s paycheck.

There’s a new form for the paper version

While most tax filers use software or a tax preparer, some still use the 1040. (That good, old-fashioned paper tax form.)

As of 2019, those who do will have a streamlined form. The new 1040 will be half the size of the previous version!

According to the IRS, the new form will use a building block approach in which the return is reduced to a simple form.

The form can be supplemented with additional schedules if needed.

The federal deadline is April 15, 2019

Tax Day will remain the traditional April 15. That’s the filing deadline and due date for federal income tax returns.

April 15 is also the due date for tax extensions for 2018 federal income tax returns. The last day to e-file a 2018 federal income tax return with an extension will be October 15, 2019. You may file paper returns even later.

Key takeaways

For doctors with large financial obligations, tax strategy can make or break your financial wellness over time.

This tax season Americans will need to factor in various changes from the Tax Cuts and Jobs Act. Whether you consult a tax professional or DIY, here are key areas to review:

  • What are you itemizing this year?
  • Did you move up or down in tax brackets?
  • Are you withholding enough from your paychecks?

There are also changes to deductions (like alimony payments) and new forms (if you fill out the paper version) to consider. All things considered, it's times like these that highlight the advantages of keeping a trustworthy tax pro nearby.

You might also like: