Taxes matter. Whether or not we agree the Tax Cuts and Jobs Act passed on December 22, 2017 is good for the middle class, good for the wealthier taxpayer, or simply good for the debt structure of America, it is here. It is happening now, and it is different.
Though these tax changes will not take effect until 2018, as you prepare for next year’s tax season, here are some highlights you should know for your tax planning process:
- Tax Rate: The top individual tax rate dropped from 39.6% to 37%. It will take more taxable dollars to get to the highest bracket.
- A single filer has to have over $500,000 taxable income in 2018 to reach the 37%.
- A filer who is married, filing jointly, must have over $600,000. Roughly, a 2% decrease in taxes on $600,000 is a $12,000 savings.
- Standard Itemized Deductions: The standard itemized deduction nearly doubled for both single and joint filers.
- $12,000 for single, head of household, and married filing separately filers.
- $24,000 for married filing jointly filers.
- If you’re over age 65, then it increases another $1,250 for each taxpayer (over age 65).
- Personal Exemptions: The bill eliminated the personal exemption completely.
- Even though the standard itemized deduction increased for married filing jointly taxpayers from $12,700 to $24,000, if you had 3 personal exemptions of over $4,000 each, you now have less overall deduction.
- Children: The Child Tax Credit increased to $2,000 and the income level to get the Child Tax Credit increases to $400,000.
- This especially helps families with the loss of the personal exemption as this is a pure tax credit and not simply a deduction, and more families can receive it.
- Medical Expense Deduction: The medical expense deduction became a little more attainable.
- Dropping to 7.5% from 10% of your adjusted gross income for people under age 65 and remained the same for those over age 65.
- The key here is to reduce your adjusted gross income as much as possible. For example, take full advantage of your 401(k) or other methods of retirement savings. For those over age 70 ½, make your charitable contributions directly from your required minimum distribution.
- Limited Itemized Deduction: The total amount of taxes you are allowed to deduct as an itemized deduction is limited to $10,000. That includes state taxes paid, real estate taxes paid, and automobile or other property taxes paid.
- For those who may still itemize – one thought is to not include state taxes at all as an itemized deduction. Then you will not have to claim any state refunds as income in the following year.
- Business Owners: There will no longer be any deduction for unreimbursed employee business expenses, union dues, tax preparation fees, or investment advisor fees. All fees deducted in the past under the miscellaneous deduction area will no longer be available. If you happen to have your own business, it may be worthwhile to allocate some of these expenses against your business revenue. This is something we can help you do and keep it legitimate.
- Charitable Contributions: Charitable contributions to a 501 c(3) remain a full deduction, though you may need to make more of them to actually benefit from these contributions on your tax return.
- If you are over 70 ½, it is worth considering the ability to make your charitable contributions directly from the required minimum distribution of your IRA. These contributions reduce your adjusted gross income directly by the amount of the contribution.
- Mortgage Interest Deductions: For any mortgages financed after January 1, 2018 the interest deduction is limited to $750,000 mortgages. Those mortgages obtained before January 1, 2018 are allowed the old rule of $1,000,000. There are more nuances on this topic so make sure to call us or bring this up with your tax advisor.
- Home Equity: The interest on your home equity line may be completely eliminated unless you had it before December 31, 2017 and/or you used it to buy or improve your home.
- Moving Expenses: Moving expenses related to new employment are no longer a deduction except for the military.
- Alimony: Alimony paid beginning in 2019 is not deductible, and alimony received will not be claimed as income. This is for settlements determined in 2018 and after.
- K-12 Tuition: Parents may use 529 savings plans for tuition at private and religious K-12 schools and help offset expenses for homeschooled children.
- Qualified Business Income: There is a 20% deduction for Qualified Business Income, however, there are so many rules and restrictions to determine this deduction it would take another whole article to explain. If you do happen to be a sole proprietor, a partner in a partnership, or a shareholder in an S-Corporation, it is worth spending some time getting to know this part of the reform. For some people, it will be a nice break. For many, it’s just a teaser.
Of course, this is only a sample of some areas to be aware of. The act is the most extensive overhaul since 1986. Although these individual tax cuts expire in 2025, there will be an impact. For most, you probably will end up with a higher taxable income but taxed at a lower rate. Therefore, the taxes due will be potentially less.
I want to say, “Have fun,” but it may be better to say, “Be prudent.”
Kyra Hollowell Morris, CFP®
For more information on tax planning and other financial services, contact one of the financial advisors at Morris Financial Concepts.