Just when you were getting comfortable with your annual chore of filing your taxes, things changed. The 2018 Trump’s tax reform bill hits the scene. In the last one year, you’ve probably heard about the tax rates, deductions, and all these updates that just leave your head spinning. But don’t worry – we’ve got you covered. We will help you build back your confidence when doing your taxes, and the good news is that even though Trump’s tax reform came with some major changes, the bill actually made many things simpler. Keep reading, and we will break down the details so you can better understand what has changed and the impact of these changes now that it is 2019.
When the tax season came to a close on April 2019, many taxpayers were surprised to notice that they actually had to pay more for their taxes and also received a significantly amount of refund dollars from the IRS (Internal Revenue Service) as compared to last year. Many taxpayers reported increased taxes despite the fact that there haven’t been any major changes in their financial circumstances since they last filed their returns.
What do low-income adults need to know about Trump’s tax reform?
Generally, if you earn less than $39,500 in a three-member household annually, you fall under the low income bracket. According to Trump’s Tax reform, if you are a single tax filer earning less than $9,525, you will be charged 10% marginal rate in taxes. If you earn between $9,526 and $38,700 you will be charged 12% marginal rate. Under the head of households, if you earn less than $13,600, you will be charged 10% tax, while earning between $13,601 and $51,800 will result in 12% tax deductions.
For married couples filing jointly, earning less than $19,050 results in 10% tax deductions, while earning between $19,051 and $77,400 will result in 12% tax deductions. For married people filing separately, earning less than $9,525 will result in a 10% tax deduction while earning between $9,526 and $38,700 will result in a 12% deduction in form of taxes.
How to calculate your tax returns:
If you are a single filer and you are earning $30,000, for example. This does not mean that you will be charged 12% of the full $30,000. In fact, you will be charged 10% on the first $9700, and then 12% of the remaining balance.
Therefore, for the case above you will be charged as follows:
10% of $9700 = $970$32,000 – $9700 = $22,300
12% of $22,300 = $2,676
Total tax deductions = ($970 + $2,676) = $3,646
This formula applies, not only for low-income earners but you keep using it as you move up the classes until you reach your income level.
How can you get into a lower income tax bracket?
It is possible to get into a lower tax bracket and pay a lower federal income tax rate. There are two basic ways of doing this, and they include credits and deductions as discussed below:
Tax credits –Your tax credits directly reduce the overall amount of tax that you owe. However, they do not affect the income bracket in which you are classified.
Tax deductions – Your tax deductions directly reduce the amount of your income that is subject to taxes. Deductions will, generally, lower your total taxable income according to the percentage that falls under your highest tax income bracket. For example, if you fall under the 22% tax bracket, tax deductions of $1,000 will save you around $220.
In simple terms, if you take all the tax deductions that you can claim, then they will reduce your total taxable income and this could put you in a lower bracket – meaning that you will pay a lower income tax rate.
So, do you now understand the difference in your current tax returns?