Taxes may be inevitable, but that doesn’t mean they’re static. Laws can change. In fact, the 2017 Tax Cuts and Jobs Act (TCJA) represented a major overhaul to the tax code, but the implications from that law are far reaching — and we still haven’t seen all of them. Here’s what you need to know about how this law impacts you, and tips to prepare for next year’s taxes.
How the Tax Cuts and Jobs Act impacts you today
Changes from this TCJA went into effect way back in 2018. Those included:
- Changes to the tax brackets: This included shifting the cut-offs and reducing the tax rates for most brackets.
- Increases to the standard deduction: It nearly doubled from 2017 to 2018 for both individuals and families.
- Raising the top estate tax bracket: While someone who had an estate of $5.6 million or more would fall into the highest estate bracket pre-act (40%), that now only applies to those who have an estate above $11.2 million.
Although these changes may sound good when taken at face value, their implications might not be what you imagine. In fact, for those who earn a lower income, the tax burden is virtually the same — while high earners are getting tax savings. So, even though taxes have always been something that adjusted alongside your earnings (lowering as you made less and increasing as you earned more), the stability that comes with that setup was somewhat lessened by the TCJA. That, combined with inflation, means that lower earners are probably feeling the sting of the TCJA more than anyone else.
For example, a $1,000 tax refund in 2017 would translate to about $1,270 in 2024 dollars. But if your earnings and refund stay the same, you aren’t getting as much value as you should be out of that refund.
The TCJA changes were also designed to end after 2025, though they may be extended if the government chooses that. Still, any shift back to higher tax rates and lower deductions could be jarring for the average person (just think back to the expiration of COVID-19-era tax breaks, which resulted in an 11% decrease in the average refund). After all, they may have relied on the current taxation system to minimize their withholdings while still getting a refund.
What you can do to prepare your 2024 taxes
Although the changes to the tax system aren’t set to be phased out until well after this year, that doesn’t mean that you shouldn’t take steps to shore up your tax situation now.
Here are a few tips to get you started:
- Review your W-2: Make sure that it reflects your current tax-filing status as well as any withholding to ensure that you aren’t going to be surprised by a smaller tax refund, or even a bill, come next April.
- Use tax-advantaged retirement accounts: A 401(k) or traditional IRA will allow you to deduct the funds you put toward retirement from your taxable income, lowering your burden and increasing any return you receive. And if you get a 401(k) match from your employer, it’s always best to at least max that out, even if you can’t reach the maximum annual contribution limit for that account type.
- Consider hiring a tax professional: If your tax situation is proving complicated this year, or you want more tailored advice for managing your tax situation than you’ll get with tax-filing software, a knowledgeable professional can help guide you. The IRS has a tax preparer database that can help you start looking.
Tax laws can fundamentally change the way your tax refund looks, and it can be difficult to predict when another big change will be on the way. Even so, taking steps to ensure you’re making the most of your income and handling your taxes appropriately based on what you know now is always the best solution to the uncertainty tax laws can bring.
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