Tax time is fast approaching, and accountants in Maine say recent changes to the federal income tax code will have an especially profound impact on two groups: those with dependent children and those who usually itemize their deductions.
The accountants said most taxpayers are likely to experience a net decrease in federal income tax as a result of new rules included in the Tax Cuts and Jobs Act of 2017. Possible exceptions include families or individuals with a large number of children, and those who typically exceed $10,000 annually in state and local tax payments.
“For the most part, most people’s taxes are going down,” said accountant Pete Dufour, owner of Dufour Tax Group in Portland and a member of the Maine Society of CPAs. “I’ve only really seen a handful of cases where people’s taxes went up.”
Under the current law, the tax code changes for individuals and families are not permanent and will expire after 2025. Until then, a number of new rules apply as of the 2018 tax year.
One change applicable to all taxpayers is that the standard deduction has been almost doubled from $6,350 to $12,000 for individuals, from $9,350 to $18,000 for heads of household and from $12,700 to $24,000 for married couples filing jointly. Meanwhile, the new law eliminates deductions for personal and dependent exemptions, which would have been $4,150 per individual under the previous law.
Tax brackets have been shifted to move many higher-income taxpayers into the 35 percent bracket, with some being bumped up from the 33 percent bracket, and others being bumped down from the 39.6 percent bracket. The highest tax bracket for the very wealthy (household incomes of over $500,000) has been reduced from 39.6 percent to 37 percent.
Most low- and medium-income earners will shift into slightly lower tax brackets, such as from 15 percent to 12 percent, 25 percent to 22 percent, and 28 percent to 24 percent.
Maine’s median household income was $56,277 in 2017, according to the U.S. Census Bureau.
Of the 650,870 Maine income tax returns filed for 2016, the most recent year available, 37 percent were for adjusted gross incomes below $25,000, 26 percent were for $25,000 to $50,000, 24 percent were for $50,000 to $100,000, 11 percent were for $100,000 to $200,000, and 3 percent were for $200,000 or more. Only 940 Maine tax returns filed for 2016 were for incomes of $1 million or more.
One group that could see their taxes increase as a result of the new law comprises individuals and families with a large number of dependent children, the accountants said. The revised tax code reduced or eliminated some child-related tax breaks while increasing others, with the ultimate net gain or loss depending largely on income.
With the dependent exemption now gone, families no longer will receive a $4,150 deduction per child. To mitigate the effect of that change, the maximum child tax credit has been doubled, from $1,000 to $2,000.
The child tax credit also phases out at higher incomes. For a single parent with two children, the child tax credit phases out completely at $280,000. For married couples with two children filing jointly, it phases out completely at $480,000. Those income thresholds are significantly higher than under the previous law, making the tax credit more accessible to higher-income families.
Another big change applies to Mainers who habitually itemize their tax deductions. By increasing the standard deduction and reducing or eliminating certain itemized deductions, the new law is designed to drastically reduce the number of taxpayers who itemize.
Michael Allen, associate commissioner for tax policy at the state Department of Administrative and Financial Services, said that in recent years, between 25 percent and 35 percent of Maine taxpayers have filed itemized returns. The share of itemized returns is expected to drop down to between 10 percent and 15 percent for 2018, he said.
“There’s going to be much fewer people that are going to be itemizing,” Allen said.
One common deduction that has changed under the new rules is the one for paying state and local taxes. In the past, there was no limit on the amount of taxes such as local property tax and state income tax that could be deducted on federal tax returns. Now, the total deduction for such taxes is capped at $10,000.
Allen said the changes in deductions are likely to provide the biggest surprise for Mainers when they prepare their tax returns for 2018.
“For the average taxpayer, those are probably the biggest changes they’re going to see,” he said.
J. Craig Anderson can be contacted at 791-6390 or at:
Twitter: jcraiganderson
__________________________
CORRECTION: This story was updated at 1:13 p.m. on Jan. 17, 2019, to correct an error in the details of the child tax credit.
Send questions/comments to the editors.
