This post is merely a courtesy for those of you haven’t had the time to tear through the Tax Cuts & Jobs Act – all 1,097 pages of it. The majority of you have probably tuned into a broadcast or two, but have been too preoccupied with…well, life… to make heads or tails of it.
And unless you plan to pack up your things and get out of dodge, you can expect to be living with the new law for quite a while. The last time we experienced a tax reform of this scope was 1986. So it’s not a bad idea to get familiar with it.
WHAT THE NEW TAX LAW MEANS FOR YOU
Your situation could be very different from the person sitting next to you depending on where you are in your life and career. So we’ve taken the liberty of pulling some particularly important notes for a number of different stages of life and interests.
If you are…
Your monthly housing costs could go up because of the new rules for deductions for property taxes and home equity loans. The deduction for home mortgage interest will be limited to interest on $750,000 of acquisition indebtedness incurred on newly purchased principal and second residences after Dec. 15, 2017, and a deduction for interest on any home equity loans will not be allowed, regardless of when the loan was obtained. The changes have already prompted many homeowners to prepay their 2018 property taxes, but doing so won’t pay off for everyone. To qualify for the deduction, you’ll need to have already received your 2018 property tax assessment.
… Considering Buying a Home
You might have been better off doing it in 2017. This year, state and local income taxes plus property taxes, added together, will no longer be deductible beyond the annual sum of $10,000. That may make buying a house with high property taxes — or buying at all — less attractive. And if you’re looking at homes that require mortgages over $750,000, you won’t be able to take a deduction on the interest for amounts above that level starting next year.
You’ll likely see lower tax rates. The average taxpayer between ages 24 and 34 may even drop a tax bracket. Not to mention, the student loan interest deductions are still safely in place. So, you’re allowed to claim a deduction of up to $2,500 per year on the interest paid for student loans. Of course, this benefit phases out as your income goes up – and you’re no longer eligible once you earn $80,000 annually (or $165,000 as a joint filer.)
You’re likely eligible for the expanded child tax credits. Depending on your tax bracket, you may not be eligible for the entire credit (up to 2k per kid.) But even without a tax liability, you’ll still get $1,400 per child back. And if you haven’t already done this, you may want to open a 529 account… or start adding more money to it. 529’s help parents pay for their children’s educations by letting them take money out free of taxes. Up until now, these funds were only to be used for college education. But now, parents can use up to $10,000 per student for public, private and religious elementary and secondary schools.
Divorced or Considering Divorce
Unfortunately, the new law doesn’t make matters any easier or less expensive for you. Alimony deductions are now a thing of the past. Under former law, alimony payments were deductible by the payer and counted as income to the recipient. The new law includes a provision repealing the current treatment for agreements signed after 2017. Thus alimony is longer be deductible or taxable.
Planning to Retire
You’ve got a new list of destinations to consider, including places like Alaska, Nevada, South Dakota and Wyoming. On the other hand, if you were planning to relax and enjoy retired life in New York, New Jersey or California… it may be back to the drawing board. You’ll also want to watch your income to avoid ending up in a less “strategic” tax bracket. Remember, income includes withdrawals from retirement funds and required minimum distributions on top of any ordinary income. But as far as your 401(k) goes, pre-tax contribution limits (including catch-ups) were untouched.
A few key provisions of the current law were left undisturbed. Those include: the 3.8% tax on investment income under section 1411 and the 0.9 percent Medicare tax on compensation, the tax rates on capital gains and qualified dividends, the exclusion of gain on sale of a residence, and the ability to identify the securities that an investor is deemed to sell (i.e., the Senate’s proposal for a ‘first-in, first out’ method is not included in the Act.)
You may need to dig a little deeper the next time you write a check. Most of us won’t see any benefit from charitable giving in 2018 because the new, higher standard deduction means more people won’t itemize. If you get creative and pool your giving in certain years, however, you may still be able to benefit. Another twist on pooling: contributing to a donor-advised fund, which is like a miniature personal foundation. The deduction for charitable contributions was preserved, with an increase in the AGI (Adjusted Gross Income) limitation for cash contributions to public charities and certain private foundations from 50% to 60%.
…But regardless of your age, interests or personal situation, everyone should make note of the new brackets established under the Act.
NEW INCOME TAX BRACKETS
The law provides for the same number of tax brackets – 7, to be exact. They are defined as follows:
- 10%: This bracket includes individuals earning up to $9,525, and/ or joint filers earning up to $19,050.
- 12%: This bracket includes individuals earning between $9,526 – 38,700, and/ or joint filers earning $19,051 – 77,400.
- 22%: This bracket includes individuals earning $38,701 – 82,500, and/ or joint filers earning $77,401 – 165,000.
- 24%: This bracket includes individuals earning $82,501 – 157,500, and/ or joint filers earning $165,001 – 315,000.
- 32%: This bracket includes individuals earning $157,501 – 200,000, and/ or joint filers earning $315,001 – 400,000.
- 35%: This bracket includes individuals earning $200,001 – 500,000, and/ or joint filers earning $400.001 – 600,000.
- 37%: This bracket includes individuals earning $500,000 +, and/ or joint filers earning $600,000 +.
OTHER NOTABLE CHANGES UNDER THE ACT WHICH COULD IMPACT YOU ARE OUTLINED HERE.
- Standard Deduction & Personal Exemptions. The standard deduction is doubled to $12,000 for individuals and $24,000 for married couples. The deduction for personal exemptions is repealed.
- State Tax Deduction. A deduction of up to $10,000 for state and local property, income or sales taxes is allowed. However, the Act precludes taxpayers from pre-paying 2018 state and local income taxes in 2017 in order to get the deduction before the $10,000 cap is imposed after 2017.
- AGI (Adjusted Gross Income) Limitations. The 3% of AGI limitation on deductions is suspended, and a reduction for miscellaneous deductions that exceed 2 percent of AGI is eliminated (including investment management fees, tax preparation fees, and unreimbursed business expenses).
- Individual AMT (Alternative Minimum Tax). The individual AMT is retained, albeit with a higher exemption ($70,300 for individuals and $109,400 for those filing jointly). There is also a higher phase-out threshold ($500,000 for individuals and $1 million for married taxpayers filing jointly.)
- IRA’s (Individual Retirement Accounts). A conversion of a traditional IRA to a Roth IRA cannot be recharacterized as a contribution to a traditional IRA. This does not prevent the conversion of a traditional IRA into a Roth IRA, only the reversal of such a conversion is barred.
- Medical Expenses. Medical expenses exceeding 7.5% of Adjusted Gross Income (AGI) will be deductible for 2017 and 2018. The Alternative Minimum Tax (AMT) preference for medical expense deductions is eliminated for 2017 and 2018.