The new tax laws that went into effect at the start of 2018 are making many paychecks a little larger and many people a little happier. The last thing we want, though, is to have this positivity take a turn at the end of the year. One thing many don’t know, or maybe aren’t thinking about yet, is how the decreased deductions and exemptions may impact your tax bill come April. It may turn out that you have a larger tax bill than in previous years despite lower tax rates. In this spirit, we took stock of some of the key points of the new tax law, so you won’t be caught off guard in a few months.
What we know for this year.
Changes to Individual Taxes
Tax Brackets – There will still be 7 tax brackets.
Top Tax Rate -For individuals is reduced from 39.6% to 37%.
Personal Exemptions – Drop from $4,050 per exemption, i.e. yourself and your dependent children, to $0.
Standard Deduction – Increase from $12,700 (Married Filing Joint, “MFJ”) to $24,000 MFJ; $6,350 (Single, “SGL”) to $12,000 SGL; $9,350 (Head of Household, “HOH”) to $18,000 HOH.
Child Tax Credit – Increased from $1,000 to $2,000 (for children under age 17).
Investments – Capital gains rates, the ability to choose which lots of investments are sold and net investment income tax will all remain as they are.
Education Funding – Student loan interest deductions up to $2,500 will remain; Tuition deduction of up to $4,000 will be retained; and American Opportunity Tax will remain at the maximum of $2,500 for 4 years (this cannot be used in combination with the tuition deduction).
529 Plans – In 2018, will be able to be used for education costs from elementary education through college rather than just college, as it is currently.
Changes to Itemized Deductions
State and Local Taxes – Currently both state and local taxes are deductible. Starting this year, these will be limited to a combined $10,000 in 2018, including property taxes and state and local income taxes.
Mortgage Interest Deduction – Currently, up to a $1,000,000 in loans which can be up to 2 homes. This will be changed to up to $750,000 in loans which can be on up to 2 homes.
Home Equity line of Credit Interest Deduction– Currently, interest on a home equity line of credit up to $100,000 is deductible under Mortgage Interest Deductions. This will be eliminated in 2018.
Medical Deduction – Currently amounts greater than 10% of Adjusted Gross Income (“AGI”), are deductible, in 2018 it will be amounts greater than 7.5% of AGI.
Charitable Deductions – Currently up to 50% of AGI, will increase to 60% of AGI in 2018.
Miscellaneous Deductions – Currently the greater than 2% of AGI are deductible. These will be eliminated in 2018. (These include unreimbursed employee expenses, tax preparation fees, investment expenses, trust fees)
Casualty and Theft Losses – Currently, amounts greater than $100 and 10% of AGI. This will be eliminated in 2018.
What will change in the longer term.
We don’t know what additional changes will come up at the close of 2018. Some of the above itemized deduction changes may shift again, or perhaps there will be more new shifts to individual taxes. We do anticipate a change in regards to alimony. Currently, alimony paid is deductible for the payor, and alimony received is included in income for the recipient. For divorces occurring in 2019 and beyond, this will be repealed. (Divorces having occurred previously will retain these income modifications.)
We will keep you up-to-date as new information is published in the coming months.
What you can do to help yourself.
Take some time to read about the new laws, and consult with an accountant to help determine how the changes will impact you. The IRS has created a wonderful, user-friendly withholding calculator that we are recommending to all our clients and friends! Find it here: https://apps.irs.gov/app/withholdingcalculator/
If you have additional questions or would like to talk about the tax reform, call our offices at 651-294-0013.