New tax law: A primer for employees

On Dec. 22, President Donald Trump signed into law a bill officially called H.R. 1 but referred to as the "Tax Cuts and Jobs Act." It is the most comprehensive change to the U.S. tax code in more than 30 years. The law significantly affects individual taxpayers, including Iowa State employees.

Mike Bootsma, Dean's Teaching Fellow and senior lecturer of accounting, provided an overview of some changes ISU employees may want to examine more closely. For additional details about the new law's impact on individual taxpayers, he suggests employees contact a certified public accountant or attorney for specific tax advice. Summaries of the law are available from various sources, including the Center for Agricultural Law and Taxation and Journal of Accountancy. 

Timing

The new tax law took effect Jan. 1. That means most individuals won't notice the changes until filing their 2018 taxes in 2019. However, ISU employees should see changes in their 2018 paychecks by Feb. 28, but possibly as soon as Jan. 31, according to Doug Anderson, payroll manager.

Some of the new changes are temporary, running from 2018 through 2025 and then expiring. However, an act of Congress could extend them further into the future.

Tax brackets

The new law retains seven individual federal income tax brackets, but lowers the rates. The following tables detail the new rates for three common taxpayer groups.

Single taxpayers

Married taxpayers filing jointly and surviving spouses

Married taxpayers filing separately

Source of charts: Journal of Accountancy

Standard deduction, exemptions and child tax credit

The standard deduction is going up for all taxpayers, nearly doubling in some cases. For example, the previous standard deduction for a single taxpayer was $6,500; the new standard deduction jumps to $12,000 in 2018. Those who are married filing jointly will see their standard deduction go from $13,000 to $24,000. However, all personal and dependency exemptions have been eliminated.

"Therefore, a married couple with two children will see their standard deduction rise by $11,000, but they will lose the ability to take a personal exemption of $4,050 for each spouse and a personal exemption for each child," Bootsma said. "So, the total loss of exemption deductions would be $16,200."

The child tax credit is increasing from $1,000 to $2,000 per qualifying child (under the age of 17) to help offset the loss of the personal and dependency exemptions. An additional $500 credit is available for qualifying dependents who don't qualify the taxpayer for the child tax credit. For example, a child 18 or older who doesn't qualify for the child tax credit could still be considered a dependent under tax law.

Itemized deductions

Many changes are afoot for taxpayers who itemize their deductions instead of taking the new, larger standard deduction. Here's a look at some of them.

• Itemized deductions will be limited to $10,000 for state income and real estate taxes, combined
• The itemized deduction for home equity loan interest has been eliminated. However, interest from a loan used to purchase a home still is deductible with new limitations. The cap on the mortgage debt used to create the interest deduction is limited to $750,000, down from $1 million under prior law. But this applies only to mortgages taken after Dec. 15, 2017; previous mortgages are grandfathered in.
• Medical expenses still qualify as an itemized deduction for taxpayers who have medical expenses in excess of 10 percent of their adjusted gross income (AGI). For tax years 2017 and 2018, that threshold is reduced to 7.5 percent of AGI.
• Itemized deductions subject to a 2 percent of AGI cap were eliminated. Some examples include tax preparation fees, unreimbursed employee expenses and safety deposit box rental fees.
• Certain charitable contributions to colleges and universities for the right to reserve or purchase seating at sporting events have been eliminated as an itemized deduction

Other eliminated deductions

• Alimony payments from a divorce decree signed or amended after Dec. 31, 2018
• Moving expenses for most taxpayers
• Tuition and fees for higher education expenses (expired after 2016)

Education

Some education deductions were slated for the chopping block in early versions of the tax bill. But the final version left those deductions in place, including the Lifetime Learning Credit, American Opportunity Tax Credit, student loan interest and the graduate tuition waiver.

Also as part of the final bill, Congress expanded the type of institutions eligible for 529 college saving plans. These plans usually are sponsored by states and allow individuals to save for higher education without incurring federal taxes. 529 plans may be used to cover tuition for K-12 private schooling and tutoring. The state of Iowa, however, may institute a "recapture" tax for individuals who use 529 plan savings to pay for primary and secondary education expenses. That's because the state already provides a tax deduction for certain amounts contributed to those 529 plans.

"This means a taxpayer who uses monies from a 529 plan that resulted in a state deduction may have to repay that tax deduction to the state of Iowa if they use those monies for private schooling and not higher education," Bootsma said.

W-4 changes on the way

With uncertainty about how the new tax law will impact individuals' income tax returns, it may be tempting to immediately update your W-4 forms, which designate how much federal and state taxes are withheld from your paycheck. But the Internal Revenue Service (IRS) will not publish new 2018 W-4 forms or instructions on the new regulations until later in January. Anderson suggests ISU employees not rush to make changes.

"It might be a wise idea to look at your W-4 to see if it needs updating due to the tax regulations, but it's hard for us to give any advice other than that until the IRS publishes its instructions," he said.

Bootsma concurs, advising employees to "proceed with caution."

"When preparing their personal tax returns this spring, employees might ask their tax adviser to help them calculate whether or not they should have more withheld [from their paychecks]," he said.

To update the federal and state W-4 tax forms, log into AccessPlus, click on the Employee tab and select "W-4 Withholding" in the left column. From there, employees may update and submit their federal and state forms.