How MagnifyMoney Gets Paid

Advertiser Disclosure

Investing

Sole Proprietorship Taxes, Deductions and Filing

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

Written By

Reviewed By

If you’re thinking of starting your own business, you need to think about how to structure it. The simplest and most common structure is a sole proprietorship. Declaring your business a sole proprietorship doesn’t require any paperwork or formal actions; it’s the status you automatically have when you open a business by yourself. As a sole proprietor, your business is unincorporated, and you have complete control over operations because you are the only person running the business.

If you own a business and are preparing to file your federal or state tax return, here’s what you need to know about sole proprietorship taxes.

What does sole proprietor mean?

As a business owner, you have to decide on a business structure. The structure you choose affects how much you pay in taxes, what paperwork you must file and your personal liability. There are several different structures to choose from, one of which is a sole proprietorship.

Sole proprietorships are for businesses owned by just one person. There is no limit on your personal liability, and your business income is reported on your personal tax return. This is in contrast to other business structures, which can involve multiple owners and limit your personal liability, or the amount you’re held responsible for in the event of an accident.

Unlike other business structures, which often require application forms and expensive filing fees, there is no added cost associated with forming a sole proprietorship. You don’t have to fill out paperwork, pay fees or jump through any hoops to get started, making it a good option when you’re just getting an idea off the ground.

Sole proprietorship taxes

Sole proprietorships are not separate business entities. Your business assets and liabilities aren’t separate from your personal assets and liabilities, so you are responsible for any debt your business incurs. As such, you are taxed as an individual, just like if you weren’t a business owner. Rather than having to fill out a separate business return, you report your business earnings and expenses on your personal tax return.

As a sole proprietor, the main difference you will experience filing taxes is that you’ll need to fill out Form Schedule C: Profit or Loss From Business (Sole Proprietorship) and attach it with your tax return. This form is a report of your income and expenses throughout the year, so it’s essential to maintain detailed records.

Sole proprietorship income tax

Since sole proprietorship owners pay taxes as individuals, you can find the sole proprietorship tax rate by looking at the income brackets for that filing year. For 2021, the following tax brackets apply:

Sole Proprietorship Tax Income Tax Brackets for 2021

Rate

Single

Married filing jointly

Head of household

10%Up to $9,950Up to $19,900Up to $14,200
12%$9,951 to $40,525$19,901 to $81,050$14,201 to $54,200
22%$40,526 to $86,375$81,051 to $172,750$54,201 to $86,350
24%$86,376 to $164,925$172,751 to $329,850$86,351 to $164,900
32%$164,926 to $209,425$329,851 to $418,850$164,901 to $209,400
35%$209,426 to $523,600$418,851 to $628,300$209,401 to $523,600
37%$523,601 or more$628,301 or more$523,601 or more

If you live somewhere that assesses state income taxes, you’ll also have to file a state personal tax return that includes your business’ profits and expenses.

Sole proprietorship self-employment tax

As a sole proprietor, you need to plan for self-employment taxes if you earn $400 or more from your business. With traditional employment, your employer covers a portion of Social Security and Medicare taxes; as a sole proprietorship, you have to pay both the employer and employee portions.

To do so, complete Form Schedule SE: Self-Employment Tax and submit it with your return. This form is what you use to calculate the Social Security and Medicare taxes you owe and is filed in addition to your Schedule C: Profit Or Loss from a Business (Sole Proprietorship) form.

Other sole proprietorship taxes that may apply

As your business grows, you may have to pay other forms of taxes in addition to your personal income taxes:

  • Employee taxes: If you hire employees, you’ll have to withhold a certain amount of money from your employees’ paychecks and pay Social Security and Medicare taxes.
  • Unemployment taxes: If you have employees, you have to pay unemployment taxes so that workers have compensation when they lose their jobs.
  • Sales tax: If you’re selling products or services, you may have to collect and pay sales taxes. If your state requires you to collect sales taxes and you don’t meet that obligation, you may have to repay the sales tax that should have been collected. If you’re not sure what your state’s tax laws are, check with your state chamber of commerce.
  • Property tax: If you own property or land used for your business, you may be subject to property taxes.

Sole proprietorship tax deductions

With tax deductions, you can reduce your taxable income, potentially lowering how much you owe the IRS. If you’re looking for sole proprietorship tax write-offs, there are multiple deductions you can claim; the ability to deduct your expenses is one of the key tax benefits of sole proprietorships.

As a sole proprietor, business deductions lower your taxable income on your personal return, so you’ll owe less and could qualify for a larger refund. You can deduct the following expenses:

  • Health insurance: If you purchase insurance for yourself, your spouse or dependents, you can deduct the cost of your health insurance from your taxable income. You can claim the deduction even if you don’t itemize your taxes.
  • Business equipment: As a business owner, you likely need some equipment for its operations, such as a computer, printer or other items. The cost of those items is deductible as long as they’re used for your business.
  • Home office: If you primarily run your business from home and have a dedicated workspace just for your work, you can claim the home office deduction.
  • Rent: If you rent an office space or manufacturing location, the rent is deductible.
  • Business insurance: If you purchase insurance for your business, such as professional liability and errors and omissions coverage, you can deduct your premiums on your tax return.
  • Business use of vehicle: If you use your vehicle solely for business purposes, you can deduct the total cost of operating the car. If you use your personal car occasionally for work, you can deduct the costs for business-related use, such as mileage for sales calls. If you work for Lyft or Uber, expenses for operating your vehicle may count as a substantial deduction.
  • Other expenses: Other business expenses, such as traveling to conferences, software or advertising fees can also be deducted.

Qualified Business Income Deduction

The Tax Cuts and Jobs Act of 2017 created a new deduction for business owners: The Qualified Business Income (QBI) Deduction. With this deduction, eligible taxpayers — including sole proprietors — can deduct up to 20% of their qualified business income. The IRS defines qualified business income as the net amount of income, gains, deductions and losses from a qualified business or trade.

If you have a Specified Service Trade or Business (SSTB), there are income restrictions on the deductions. The following fields are classified as SSTB:

  • Actuarial science
  • Athletics
  • Consulting
  • Financial services
  • Health
  • Investing
  • Law
  • Performing arts

You can claim this business deduction in addition to your other personal deductions, which helps to reduce your taxable income even further.

Filing taxes as a sole proprietor

Filing taxes as a sole proprietor isn’t much different than filing your personal tax return as an employee. The biggest difference is that you may need to make estimated tax payments each quarter rather than paying your taxes once a year.

To minimize stress and ensure your tax return is accurate, be sure to keep records of business expenses and keep copies of receipts and invoices.

Using bookkeeping software like QuickBooks, FreshBooks or Wave can help to simplify taxes for sole proprietors. You can use software to track and send invoices, input expenses and receipts and run reports. Some programs, such as Quickbooks Self-Employed, will also calculate how much you owe each quarter in taxes so you can make your estimated tax payments. And, you can use these online tax software to file your tax return.

Finally, if your personal taxes are more complicated, or want an expert’s assistance, you may want to consult with a tax professional about filing taxes as a sole proprietor.

Sole proprietorship tax filing deadline

Taxes have to be paid as you earn money throughout the year. For regular employees, a portion of your paycheck is withheld for taxes every pay period. As a sole proprietor, you’re responsible for withholding money for those taxes yourself.

If you’re in business for yourself — and aren’t employed by anyone else — you’ll likely have to pay estimated taxes each quarter. Sole proprietors are required to make estimated tax payments if they expect to owe $1,000 or more when they file their tax returns. If you don’t, you could incur significant penalties.

The sole proprietorship tax filing deadline for estimated payments is as follows:

  • April 15
  • June 15
  • Sept. 15
  • Jan. 15

You can fill out Form 1040-ES, or you can send your payment in electronically through IRS Direct Pay.

Tip: Filing quarterly taxes for sole proprietorships isn’t always necessary. If you own a business but also have a job and receive a W-2, you can avoid making estimated tax payments by requesting a new W-4 Form from your employer and adjusting your withholding. Use the IRS’ Tax Withholding Estimator to find out how much you should withhold from each paycheck to satisfy your tax obligation.

Sole proprietorship tax forms

If you aren’t sure how to file taxes as a sole proprietor, you should know they aren’t that much more complicated than preparing a personal tax return. As a sole proprietor, you’ll likely have to complete the following tax forms:

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.

How MagnifyMoney Gets Paid

Advertiser Disclosure

Investing

How Many Tax Allowances Should I Claim? What You Need to Know

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

Written By

Reviewed By

Before changes to the tax system went into place in 2020, one of the most significant factors impacting your paycheck was the number of tax allowances you claimed on your W-4 form. By claiming multiple allowances, you could reduce how much of your paycheck was withheld for federal income taxes.

However, all that changed with the passage of the Tax Cuts and Jobs Act (TCJA). Here’s what you need to know about the old tax allowance system, and how federal income tax withholdings are handled now.

Tax allowance definition: What was it, and how did it work?

Tax allowances used to be incredibly important before they were changed by the TCJA in an effort to simplify taxes and streamline the W-4 . By adjusting your tax allowances on your W-4, you could have more money withheld from your paycheck for taxes — or put more money in your pocket.

When you work for an employer, you are legally required to fill out a W-4; based off of the W-4, your employer withholds a certain amount of your paycheck every pay period to cover your tax bill. Previously, tax withholding allowances functioned as exemptions. For each tax allowance you claimed, less money would be taken out of your paycheck to cover your taxes. If you claimed zero allowances, your employer would withhold the maximum amount for taxes. The more allowances claimed, the less would be withheld for taxes.

Now, tax allowances are no longer used on the W-4, and with the changes to the law, you can’t claim personal deductions or dependency exemptions. The form now features just a few basic questions about your tax filing status and dependents to calculate your withholding — a notable contrast to the old form (shown below), which included the personal allowances worksheet that would prompt you to enter “1” for every allowance that applied to you.

Source: IRS

Withholding tax definition: What is it and how does it work?

The federal income tax system requires you to pay as you go, meaning you must pay taxes as you receive income during the year.

Federal withholding tax is how much your employer withholds from each of your paychecks and pays to the IRS on your behalf. To determine how much to take out of your paycheck for federal income taxes, employers must have employees complete W-4 forms.

An accurate W-4 is essential. If you’re withholding too little, you could pay less federal income taxes than is required, leaving you with a hefty bill at tax time and underpayment penalties. If you withhold too much, more money is taken out of your paycheck than is necessary. You can get the money back as a refund when you file your tax return, but it may be better to adjust your withholding so you can get that money in every paycheck. (Here’s why you should not use your tax refund as forced savings.)

How to calculate your tax withholding

If you received a large tax refund last year, you’re likely withholding more than is necessary from your paycheck for taxes. If you’d like to have access to that money during the year rather than getting a lump sum refund after filing your taxes, you can change your withholdings so less is taken out of each paycheck.

If you need to change your tax withholding, you can check your withholding for 2021 by using the IRS Tax Withholding Estimator tool. Common circumstances that would cause you to change your withholding include:

  • Starting a new job
  • Getting married
  • The birth or adoption of a child
  • Purchasing a new home

To use the Tax Withholding Estimator tool, follow these steps:

  1. Gather information: To use the tool, you’ll need the most recent pay stubs for yourself and your spouse, if applicable. You’ll also need information for other sources of income, such as investments, as well as last year’s tax return.
  2. Answer Questions: The tool will ask you questions about your tax filing status, your dependents, your expected income and the frequency with which your employer pays you, as well as if you contribute to an employer-sponsored retirement plan, Health Savings Account or Flexible Spending Account. You’ll input how much in federal taxes you’ve paid so far and how much is taken out of each paycheck.
  3. Review results: Based on the information you entered, the Tax Withholding Estimator will tell you your anticipated tax obligation and how much you’re currently withholding. If you’re overpaying, it’ll give you a total of just how much you’ve overpaid. It’ll also tell you how much should be withheld from each paycheck to meet your obligation.
  4. Complete a new W-4: If you decide to change your withholding, you must complete a new W-4 form. When filling out the form, use the Tax Withholding Estimator to find out how much you should enter on the form for credits and other reductions to annual withholding. Sign and date the form, and give it to your employer.

How to change your tax withholding

Now that tax allowances are no longer an option, you’ll need to complete the new W-4: Employee’s Withholding Certificate. To do so, follow these steps:

  1. Step One: The first section of the W-4 asks for your personal information, including your name, Social Security number, address and filing status.
  2. Step Two: Not everyone will need to complete this second section, Multiple Jobs or Spouse Works. If you only have one source of income or a non-working spouse, you can skip this section — otherwise, you’ll need to complete a W-4 for every job you have.
  3. Step Three: For the Claim Dependents section, your income needs to be $200,000 or less ($400,000 or less if married filing jointly). Multiply the number of children you have under the age of 17 by $2,000 and enter the resulting number on the line. If you have other dependents, multiply the number of dependents you have by $500.
  4. Step Four: An optional step, this portion is for other adjustments, such as retirement income or interest earned. If you want to withhold additional money from your paycheck, you can also include the added amount here.
Source: IRS

Withholding tax exemption

If you’re exempt from tax withholding, you don’t make any federal tax payments throughout the year from your paycheck. Since that can sound appealing, you may be wondering: “Am I exempt from tax withholding?”

To qualify for a withholding tax exemption, both of the following need to be accurate:

  • You owed no federal income taxes in the prior tax year
  • You expect to owe no federal income taxes in the current tax year

If you aren’t sure if you’re exempt from withholding or otherwise need help managing your taxes, contact a tax professional or financial advisor for assistance.

The “Find a Financial Advisor” links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor (“MMA”). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMA’s referral program, which may or may not include the investment advisers discussed.

How MagnifyMoney Gets Paid

Advertiser Disclosure

News

The Trump Tax Plan Explained

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

Written By

Reviewed By

When the Trump tax plan, formally known as The Tax Cuts and Jobs Act (TCJA), was enacted in 2017, taxes changed drastically for many Americans. Noted as the most sweeping rewrite of the tax code in more than three decades, the tax reform implemented new federal income tax brackets and doubled the standard deduction, among many other changes.

The majority of the Trump tax plan’s changes went into effect on Jan. 1, 2018, which means most Americans felt the impact of the TCJA for the first time when they filed their 2019 taxes.

What the Trump tax plan changed

Some of the changes made by the Trump tax plan may already be familiar to you, but here you can read about all of the changes it introduced or jump ahead to read about the rules you’re most interested in:

A 529 college savings plan is a tax-advantaged savings account designed to encourage saving for qualified future higher-education costs, such as tuition, fees and room and board. Your money is invested and grows tax free.

Old Rule

New Rule (Effective Jan. 1, 2018)

Previously, 529 plan savings could only be used on qualified higher education expenses.

New Rule (Effective Jan. 1, 2018)

In a major victory for wealthier families, you can now use 529 savings for private K-12 schooling.

Tax benefits are now extended to eligible education expenses for an elementary or secondary public, private, or religious school.

The new rules allow you to withdraw up to $10,000 a year per student (child) for education costs.

The individual mandate was a key provision of the Affordable Care Act that required non-exempt U.S. citizens and noncitizens who lawfully reside in the country to have health insurance.

Old Rule

New Rule (Effective Jan. 1, 2019)

Consumers who did not qualify for an exemption and chose not to purchase insurance faced a range of tax penalties, depending on income.

New Rule (Effective Jan. 1, 2019)

The individual mandate is out.

Starting Jan. 1, 2019, consumers who do not purchase health insurance will no longer face penalties.

GOP lawmakers argue that the measure will decrease spending on the tax subsidies it offers to balance out the cost of premiums for millions of Obamacare enrollees.

However, without the mandate, experts caution that fewer healthy and young people will sign up for health coverage through the insurance marketplace, which will likely lead to increases in premium costs for those who remain the marketplace and could even induce some insurers to drop out of the market altogether. It’s a big blow to supporters of the long-embattled health care law.

Old Rule

New Rule (Effective Jan. 1, 2019)

The individual paying alimony or maintenance payments could deduct payments from their income. The person receiving the payments included them as income.

New Rule (Effective Jan. 1, 2019)

The person making alimony or maintenance payments does not get to deduct them, and the recipient does not claim the payments as income. This goes into effect for any divorce or separation agreement signed or modified on or after Jan. 1, 2019.

The individual alternative minimum tax, or AMT, often imposed on higher-income families, especially those with children, who live in high-tax states — but not necessarily the ultra rich. It requires many households or individuals to calculate their tax due under the AMT rules alongside the rules for regular income tax. They have to pay the higher amount. Whether or not a someone pays AMT depends on their alternative minimum taxable income (AMTI). AMTI is determined through a series of assessments of a taxpayer’s income and assets — the explanation of calculating AMTI takes up two pages in the tax bill, so we’re not getting into the details here.

Old Rule

New Rule (Effective Jan. 1, 2018)

The exemption amount was $84,500 for married joint-filing couples, $54,300 for single filers and $42,250 for married couples filing separately.

The AMT exemption began to phase out at $120,700 for singles, $160,900 for married couples filing jointly and $80,450 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The AMT is here to stay but fewer households will have to face it.

Under the new rules, which are in effect from Jan. 1, 2018 through Dec. 31, 2025, married couples filing jointly will be exempt from the alternative minimum tax starting at $109,400. Exemption starts at $70,300 for all other taxpayers (other than estates and trusts).

The exemption phase-out thresholds will rise to $1,000,000 for married couples filing jointly, and $500,000 for all other taxpayers.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers could exclude up to $20 a month of qualified bicycle commuting reimbursements from their gross income. That included payments from employers for things like a bicycle purchase, bike maintenance or storage. Workers could claim the exclusion in any month they regularly use a bicycle to commute to work and do not receive other transit benefits.

New Rule (Effective Jan. 1, 2018)

The exclusion is suspended through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

The child tax credit was $1,000 per child under the age of 17.

The credit was reduced by $50 for each $1,000 a taxpayer earned over certain thresholds. The phase-out thresholds started at a modified adjusted gross income (AGI) over $75,000 for single individuals and heads of household, $110,000 for married couples filing jointly and $55,000 for married couples filing separately.

New Rule (Effective Jan. 1, 2018)

The child tax credit doubles to $2,000 per qualifying child. Up to $1,400 of the child tax credit can be received as refundable credit (meaning it can go toward a tax refund). The new rule also includes a $500 nonrefundable credit per dependent other than a qualifying child.

The credit begins to phase out at an AGI over $200,000 — for married couples, the phase-out starts at an AGI over $400,000.

This rule is in effect through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Under a four-step graduated rate structure, the top corporate tax rate was 35 percent on taxable income greater than $10 million.

New Rule (Effective Jan. 1, 2018)

Permanently cuts the top corporate tax rate to 21 percent.

The estate tax, aka the “Death Tax” is a tax levied on significantly large estates that are passed down to heirs.

Old Rule

New Rule (Effective Jan. 1, 2018)

Estates up to $5.49 million in value were exempt from the tax.

The top tax rate was 40 percent.

New Rule (Effective Jan. 1, 2018)

Doubles the exemption for the estate tax.

Now, estates up to $11.2 million are exempt from the tax.

Old Rule

New Rule (Effective Jan. 1, 2018)

Homeowners could exclude up to $250,000 (or $500,000, if married filing jointly) of gains made when selling their primary residence, as long as they owned and primarily lived in the home for at least two of the five years before the sale. The exclusion could be claimed only once in a two-year period.

New Rule (Effective Jan. 1, 2018)

Homeowners can still exclude gains up to $250,000 (or $500,000 if married filing jointly) when they sell their primary residence, but they have to have lived there longer. People who sell their homes after Dec. 31, 2017 now have to use the home as their primary residence for five of the eight years before the sale in order to claim the exclusion. It can only be claimed once in a five-year period.

The new rule expires on Dec. 31, 2025.

Old Rule

New Rule

Taxpayers were previously allowed to deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income or 7.5 percent if they or their spouse were 65 or older.

New Rule

The threshold for all taxpayers to claim an itemized deduction for medical expenses is lowered to 7.5 percent of a filer’s adjusted gross income.

The change applies to taxable years from Dec. 31, 2016 to Jan. 1, 2019.

Taxpayers can take the miscellaneous tax deduction if the items total more than 2 percent of their adjusted gross income. The amount that’s deductible is the amount that exceeds the 2 percent threshold. These are some of the major changes coming to the miscellaneous tax deduction.

Old Rule

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers could claim an itemized deduction of the amount of money they pay for tax-related expenses, like the person who prepares their taxes or any software purchased pr fees paid to fee to file forms electronically.

Work-related expenses: Workers could deduct unreimbursed business expense as an itemized deduction, like the cost of a home office, job-search costs, professional license fees and more.

Investment fees: Taxpayers could deduct fees paid to advisors and brokers to manage their money.

New Rule (Effective Jan. 1, 2018)

Tax preparation: Taxpayers may not claim tax-preparation expenses as an itemized deduction through 2025.

Work-related expenses: The bill suspends work-related expenses as an itemized deduction through 2025.

Investment fees: Under the new rules, the investment fee deduction is suspended until 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Homeowners were allowed to deduct interest paid on mortgages valued up to $1 million on a taxpayer’s principal residence and one other qualified residence.

They could also deduct interest paid on a home equity loan or home equity line of credit no greater than $100,000. These were itemized deductions.

New Rule (Effective Jan. 1, 2018)

New homeowners can include mortgage interest paid on up to $750,000 of principal value on a new home in their itemized deductions.

The old, $1 million caps continues to apply to current homeowners (those who took out their mortgages on or before Dec. 15, 2017), as well as refinancing on mortgages taken out on or before Dec. 15, 2017, as long as new mortgage amount does not exceed the amount of debt being refinanced.

Homeowners CAN deduct interest paid on a home equity line of credit or home equity loan, so long as the loan was used to buy, build or substantially improve your home.

These changes are set to expire after 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Previous tax law allowed taxpayers to deduct moving expenses as long as the move was of a certain distance from the taxpayer’s previous home and the job in the new location is full-time.

New Rule (Effective Jan. 1, 2018)

The new tax bill suspends the moving expense deduction through 2025. Until then, taxpayers are not permitted to deduct moving expenses.

Moving-related deductions and exclusions remain in place for members of the military.

Pass-through businesses are generally small businesses (also some big firms) that don’t pay the corporate income tax. Instead, the owners report the corporate profits as their own income and pay taxes based on the individual tax rates along with their regular personal income tax.

Some of the common types of pass-through businesses are partnerships, LLCs (limited liability companies), S corporations and sole proprietorships.

Old Rule

New Rule (Effective Jan. 1, 2018)

All pass-through business owners’ income was previously subject to regular personal income tax.

New Rule (Effective Jan. 1, 2018)

Under the new laws, pass-through business owners can deduct up to 20 percent of their qualified business income from a partnership, S corporation or sole proprietorship.

Individuals earning $157,500 and married couples earning $315,000 are eligible for the fullest deduction.

Old Rule

New Rule (Effective Jan. 1, 2018)

Individuals could deduct uninsured losses above $100 when property was lost to a fire, shipwreck, flood, storm, earthquake or other natural disaster. The deduction was allowed as long as the total loss amounted to greater than 10 percent of the taxpayer’s adjusted gross income.

New Rule (Effective Jan. 1, 2018)

The new tax bill only allows taxpayers to claim the deduction if the loss occurred during a federally declared disaster, through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers could reduce their adjusted gross income by claiming personal exemptions — generally for the taxpayer, their spouse and their dependents.

Taxpayers could deduct $4,050 per exemption in 2017, though the deduction was phased out for taxpayers earning more than certain AGI thresholds. The phase out began at an AGI over $313,800 for married couples filing jointly, $287,650 for heads of household, $156,900 for married couples filing separately and $261,500 for all other taxpayers.

New Rule (Effective Jan. 1, 2018)

Personal exemptions have been suspended through 2025.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers who did not itemize could claim the current standard deduction of $6,350 for single individuals, $9,350 for heads of household or $12,700 for married couples filing jointly

New Rule (Effective Jan. 1, 2018)

Standard deductions for all nearly double under the new rules.

Individuals see standard deductions rise to $12,000; forlim heads of household, it rises to $18,000; and for married couples filing jointly the standard deduction increases to $24,000.

Old Rule

New Rule (Effective Jan. 1, 2018)

Taxpayers had the option of including state and local property, income and sales taxes as itemized deductions.

New Rule (Effective Jan. 1, 2018)

Taxpayers are limited to claiming an itemized deduction of $10,000 in combined state and local income, sales and property taxes, starting in 2018 through 2025.

Taxpayers cannot get around these limits by prepaying 2018 state and local income taxes while it is still 2017. The bill says nothing about prepaying 2018 property taxes.

Old Rule

New Rule (Effective Jan. 1, 2018)

Student loan debt discharged due to death or disability was taxed as income.

New Rule (Effective Jan. 1, 2018)

Under the new tax bill, student loan debt discharged due to death or disability after Dec. 31, 2017, will not be taxed as income. The rule lasts through 2025.

The table below shows the difference between the tax rates and brackets before the Trump tax plan went into effect on Jan. 1, 2018 and after.

Tax Rules Pre-TCJA

Tax Rules Post-TCJA

Before 2018, there were seven tax brackets.

The rate on the highest earners was 39.6 percent for taxpayers earning above $418,400 for individuals and $470,700 for married couples filing taxes jointly.

New Rule (Effective Jan. 1, 2018)

The new rules retain seven tax brackets, but the brackets have been modified to lower most individual income tax rates. The new brackets expire in 2027.

Top income earners — above $500,000 for individuals and above $600,000 for married couples filing jointly — falls from 39.6 percent to 37 percent.

The majority of individual income tax changes would be temporary, expiring after Dec.
31, 2025.

Pre-TCJA Tax Brackets Post-TCJA Tax Brackets (Effective Jan. 1, 2018)
Single Individuals
Taxable Income Tax Bracket Taxable Income Tax Bracket
$9,325 or less 10% $9,525 or less 10%
$9,326 to $37,950 15% $9,526 to $38,700 12%
$37,951 to $91,900 25% $38,701 to $82,500 22%
$91,901 to $191,650 28% $82,501 to $157,500 24%
$191,651 to $416,700 33% $157,501 to $200,000 32%
$416,701 to $418,400 35% $200,001 to $500,000 35%
Over $418,400 39.60% Over $500,000 37%

Married Individuals Filing Joint Returns and Surviving Spouses
Taxable Income Tax Bracket Taxable Income Tax Bracket
$18,650 or less 10% $19,050 or less 10%
$18,651 to $75,900 15% $19,051 to $77,400 12%
$75,901 to $153,100 25% $77,401 to $165,000 22%
$153,101 to $233,350 28% $165,001 to $315,000 24%
$233,351 to $416,700 33% $315,001 to $400,000 32%
$416,701 to $470,700 35% $400,001 to $600,000 35%
Over $470,700 39.60% Over $600,000 37%

Heads of Households
Taxable Income Tax Bracket Taxable Income Tax Bracket
$13,350 or less 10% $13,600 or less 10%
$13,351 to $50,800 15% $13,601 to $51,800 12%
$50,801 to $131,200 25% $51,801 to $82,500 22%
$131,201 to $212,500 28% $82,501 to $157,500 24%
$212,501 to $416,700 33% $157,501 to $200,000 32%
$416,701 to $444,550 35% $200,001 to $500,000 35%
Over $444,550 39.60% Over $500,000 37%

Married Individuals Filing Separate Returns
Taxable Income Tax Bracket Taxable Income Tax Bracket
$9,325 or less 10% Not over $9,525 10%
$9,326 to $37,950 15% $9,525 to $38,700 12%
$37,951 to $76,550 25% $38,701 to $82,500 22%
$76,551 to $116,675 28% $82,501 to $157,500 24%
$116,676 to $208,350 33% $157,501 to $200,000 32%
$208,351 to $235,350 35% $200,001 to $300,000 35%
Over $235,350 39.60% Over $300,000 37%

Tax deductions that didn’t change after the Trump tax plan

Teacher deduction

Teachers can deduct up to $250 for unreimbursed expenses for classroom supplies or school materials from their taxable income.

Electric cars

Electric car owners who bought a vehicle after 2010 may be given tax credit of up to $7,500, depending on the battery capacity.

Adoption assistance

Adoptive parents are allowed a tax credit and employer-provided benefits up to $13,570 per eligible child in 2017.

Student loan interest deduction

Student loan borrowers may deduct up to $2,500 on the interest paid for student loans every year.

How the Trump tax plan affects you

Low-income earners: Changes to the tax rates at lower-income levels were less pronounced or nonexistent compared to the changes in higher brackets, offering no tax break for lower-income households.

Middle-class earners: The decreased tax rates should have decreased the taxable income for middle-class earners, as long as they adjusted their W-4 withholding forms.

High-income earners: With their high levels of income falling into more brackets, high-income taxpayers had more to gain from the lowered tax rates. Those with large amounts of income from investments also benefited from the decreased tax brackets for capital gains, meaning their investment income was also reprieved, especially at high levels.

High-value estates: The Trump tax plan doubled the estate tax exemption amount from $5.49 million in 2017 to $11.2 million in 2018.

Areas with high state and local income tax: The Trump tax plan amended the state and local income tax (SALT) deduction so that taxpayers can only claim up to $10,000 in combined state and local income, sales and property taxes as an itemized deduction. Taxpayers living in places with high state and local taxes will get disproportionately hit by this change.

Taxpayers using personal exemptions: A personal exemption allowed you to deduct set amounts for each taxpayer and dependent on your tax return, which could have benefitted taxpayers with large families of dependents. This exemption and possible tax benefit for many has now been suspended.

Those without health insurance: The Trump tax plan eliminated the tax penalty you could face if you did not enroll for health insurance under the Affordable Care Act (ACA) and did not qualify for an exemption.

FAQ: Tax filing tips for 2021

Taxes for tax year 2020 are due to the IRS by April 15, 2021. If you need more time to file, you can file Form 4868 by April 15 to receive an automatic six-month extension. However, this does not provide a payment deadline extension if you owe taxes; you will still have to make your tax payment by April 15.

You might have been overpaying or underpaying on your taxes before the tax reform went into effect, which could mean a tax bill or bigger-than-expected tax refund this time around.

To avoid confusion, consult a tax professional and consider adjusting your allowances on your W-4.

If you end up owing taxes, you’ll need to pay your bill by April 15th or contact the IRS to sign up for a payment plan. Late payments will result in penalties and additional fees.

The IRS typically sends out tax refunds within 21 days of receiving your filing. It can take longer on some occasions, depending on your situation. If you file your return electronically, you can check the status of your refund after 24 hours from filing, through the IRS’ Where’s My Refund? tool. If you mail in your return, you can check the status four weeks after mailing. You can also use your smartphone to download the IRS2Go app to check your refund status.

It’s certainly tempting to use the money to book your next much-deserved vacation. But treating yourself isn’t necessarily the best way to spend your tax refund. Instead, consider stashing it away inside a savings vehicle and forgetting you even had extra cash to spend. An easy option is to boost your emergency savings by depositing your refund in a high-yield savings account. That will grow your refund efficiently over time and can save you some financial grief in the future.

A savings account can be easily accessed in case you need the funds in a pinch, unlike with a high-rate certificate of deposit. A CD works better if you need to save towards a longer-term goal, like making a down payment on a house in a few years. Once you make your deposit into a CD, it grows undisturbed for the length of its term. In exchange for leaving your deposit untouched with the bank, you get to grow your CD funds at high interest rates, resulting in some solid savings growth when the term ends.

Other options include using your refund to expand your investment portfolio or placing the funds in an IRA. Investing your refund can be a riskier way to grow your money since your returns depend on the market instead of an APY. And of course, saving in an IRA is a smart way to invest in your retirement future. The IRS even allows you to split your refund between multiple accounts when you sign up for direct deposit. This makes it easy for you to save your refund in various ways.

Do you have a savings goal in mind? Tell us about it!