In December 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). This major piece of legislation represents the largest tax overhaul in over three decades. As a freelancer, you’re probably curious about how the 2018 tax changes will impact you. Well, we’ve got you covered. Here’s a breakdown of the specific changes that may affect your business, finances and savings plan.
Lower Federal Tax Brackets
There will still be seven federal income tax brackets, but they’ve been adjusted to new income ranges and slightly lowered rates. The new income tax brackets are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.
Depending on which range you fall under, you could be paying less in taxes. For example, let’s say you’re a single tax filer and expect to make anywhere from $38,700 to $82,500: Your tax bracket will drop by 3 percent to 22 percent.
The New Pass-Through Deduction
Overall, the biggest buzz is probably around the latest tax deduction. This applies to “pass-through” entities like sole proprietorships, S-Corps and partnerships. If you’re an indy whose business structure falls under one of these categories, you can enjoy a tax deduction of up to 20 percent on your qualified business income (QBI). It’s important to note, however, that the exact size of the deduction will vary based on your total income and the nature of your business activity.
If you’re single and expect to earn less than $157,500 this year, or if you’re married, filing jointly and expect to earn less than $315,000 in total, you can deduct 20 percent of your pass-through income. But there may be limitations to claiming this deduction if you’re a high earner and work in a specific industry, like health or law.
A Higher Standard Deduction
The standard tax deduction has been bumped up from $6,350 in 2017 to $12,000 for single filers, and from $12,700 to $24,000 for married couples who file a joint return. Ultimately, this means that more taxpayers will opt for the itemized deduction when filing their taxes.
While the majority of deductions for the self-employed remain intact, there are a few that have been removed from the list. This includes some deductions associated with the cost of business-related entertainment and moving expenses. Make sure you’re aware of what deductions did and didn’t change under the new law — so that you can optimize your savings accordingly.
Repeal of the Health Care Penalty
The latest tax reform has repealed the individual penalty for failing to have health insurance. But keep in mind that this specific provision doesn’t go into effect until 2019. And there’s speculation that insurance premiums may spike, which means you might end up paying more for health care. Only time will tell how this will affect tax obligations for the self-employed.
Paying for Your Quarterly Taxes
When it comes to your quarterly taxes, keep saving and setting aside money as you normally would. But depending on your specific situation, you may need to adjust how much you save. Reach out to your accountant or another tax professional to gauge if and how the latest tax changes could affect how much you owe at tax time.
The more you know about the 2018 tax changes associated with the TCJA, the better prepared you’ll be to make the necessary adjustments and optimize your deductions. Are you ready to file?