While much of the news is focused on the government shut down, for most Americans, it’s business as usual. The IRS is keeping 43% of it’s workforce up and running but wished to have more during the upcoming tax season. While the new tax laws won’t affect your 2017 returns, there are some things you should know as you move into the next few years. Here are 8 ways the tax bill may affect you.
New Tax Brackets
There was talk of cutting the current level of seven brackets down to three with tax reform but that didn’t happen. What did happen was generally cutting the rates for the seven brackets. The lowest rate stayed at 10 percent, while the 15-percent bracket dropped to 12 percent. The highest marginal rate was 39.6 percent on taxable income above $470,701 in 2017. Those at this highest end of the tax matrix will be happy, because the new top bracket will pay only 37 percent of income in taxes, and the income required to hit the threshold is now $500,000 for singles and heads of households and $600,000 for married couples.
Increased Standard Deduction
The standard deduction, which all taxpayers are able to cut from their income, was $12,700 in 2017 for married couples. It was half that number for singles. In 2018, the standard deduction will go up to $12,000 for singles and $24,000 for married couples filing jointly. This means that the first $12,000 or $24,000 that you make will not be subject to federal income tax.
No Personal Exemptions
This change to the tax code could hurt you if you have several children. In 2017, in addition to the standard deduction, families could effectively cut $4,050 from their taxable income for everyone who lived in their households as dependents. For example, a married couple with five minor children would have been able to cut more than $41,000 ($12,700 for the standard deduction plus $4,050 for both spouses and each of the five kids) from their taxable income right off the bat. Now, that family will only be able to take the standard deduction of $24,000.
Increased Child Tax Credit
The loss of personal exemptions is offset at least partially by the increased child tax credit. In 2018, the child tax credit grows from $1,000 to $2,000. This credit cuts the amount of tax that you might owe dollar for dollar, and it’s refundable up to $1,400. It counts any kids who are classified as dependents and under 17 years of age.
401k Treatment
If you have no children or your children have already left the nest, it’s more likely that you might have a bit of disposable income available. There was some concern that if the initial House version of the tax bill became law, the amount of retirement savings that are deductible would greatly get cut. Some rumblings suggested that the limit would be only $2,400. Fortunately for retirement savers, it will still be possible to deduct the maximum allowed in traditional 401k plans. This will be $18,500 in 2018. Depending upon your individual tax bracket, you could cut your tax liability by as much as $6,845 by maxing out your 401k or 403b. Remember, it’s possible to contribute for 2017 and get the deduction for that year until tax day.
Mortgage Interest Deductions
There are two parts to this change in the tax law. Previously, it was possible to deduct mortgage interest expenses on loans up to $1 million. With the new tax reform, you’ll only be able to deduct mortgage interest on home loans up to $750,000. Under the old tax code, interest on home equity loans was deductible. After the new tax law goes into effect, however, interest on home equity loans will not be deductible at all, no matter the size of the loan. Therefore, it might be better to pay off these loans more quickly to save on interest payments.
State and Local Taxes
Under previous tax law, it was possible to deduct state and local taxes, also known as the SALT deduction. The earliest drafts of the new legislation did away with the SALT deduction altogether but the final draft that President Trump signed into law allows for the first $10,000 of state and local taxes to be deductible. This will hurt a little more if you live in areas with high property taxes and high property values.
Moving Expenses
Beginning in 2018, Americans will no longer be able to deduct expenses that are tied to a job-related move. Previously, as long as you had to move 50 miles for your new job, you were able to deduct most of the expense. This will not be the case going forward. There will be no tax deduction for these moves starting in 2018.
The tax law will impact just about everyone in one way or another. Many deductions are going away. Some, like an amended mortgage interest deduction and the deduction for charitable contributions remain, albeit sometimes with modifications.
Learning about the changes and how they affect you can help you plan for the future so that you pay no more than necessary. Contact us today to schedule your free portfolio review and see how taxes may be affecting your retirement portfolio.
*Advisory services offered through Trajan Wealth, L.L.C., an SEC registered investment adviser.
