The 2019 tax season is almost here. It officially starts next week. And the Tax Cut and Jobs Act figures to play a huge role in how this year’s tax season plays out. With so many changes, there are sure to be many questions and surprises for both taxpayers and tax preparers. So how will these changes affect the upper middle class? In other words, if you made $125,000 in 2018, what can you expect for you’re your tax return? And what things do you need to consider when filing your taxes to get the greatest return?
Know Your Situation
As with any tax situation, there is no one-size-fits-all answer. Everyone has his or her own unique set of circumstances, so make sure you understand your personal situation before making your tax decisions. That’s because for those who made $125, which is essentially twice the amount of the median household income, the net tax savings could vary greatly, depending on your circumstances.
Child Tax Credit Goes Up; Personal Exemption Goes Away
The new tax reform does provide a major boost for families with children via the Child Tax Credit, which was doubled. However, the personal exemption is now gone, meaning the deduction could be less than normal for larger families. The standard deduction also increased, to $24,000 for married couples and to $12,000 for single filers. So how those factors play out will depend on your specific situation. For a typical family of four, the news could be good.
New Tax Rate to Lower Overall Bill
For example, for a family of four with both parents working and earning a combined $125,000, the tax savings could be slightly more than $4,000 for 2018 compared to 2019, assuming they don’t itemize. Their taxable income would actually go up, but the lower tax rate would decrease their bill. A single person with the same income would save about $3,600 in 2018 compared to 2017. However, that person’s taxable amount would be more than double that of the family of four.
Itemizing Will Play Key Factor
But the biggest factor probably comes down to whether or not you itemize your deductions. If you previously itemized but the new standard deduction is higher than your itemized deductions then you come out equal or ahead. However, if your itemized deductions were higher than the new standard deduction amount, then you will not receive any benefit from the new higher standard deduction rate.
State and Local Income Taxes Hurt in High-Tax States
In particular, those who deducted state and local income taxes as part of their itemized deductions could take a big hit this year. That’s because the Tax Cut and Jobs Act have put a cap of $10,000 on those deductions. For many taxpayers that live in high-tax states, that could cause a significant increase in their tax bill. While it appears that most people in the upper-middle class tax bracket will see some tax savings, it will depend on each family or individual’s personal circumstances. That’s why it’s always a good move to speak with a professional tax preparation firm for help.