I am guessing that putting “tax returns” in the title of this post is not the best way to get people to read my message. In my defense, writing about taxes does not stimulate my creative side, so I thought a more direct approach made sense. If you’ve made it this far, I thank you for trusting that I would add value through a conversation around income tax changes that will impact your planning moving forward.
A lot changed with the new Tax Cuts and Jobs Act [TCJA] in 2018. My goal is not to provide you with every change (I do want you to be awake by the end of this), but to provide you with the most relevant information for you and our clients. We encourage you to set up a time to meet with your tax accountant or your CPA if you want to understand all changes that will impact your 2018 tax return. However, your CFP(R) professional at Facet is available if you want to talk about the impact on your financial plan.
The Tax Cuts and Jobs Act was signed into law in December of 2017. Here are some of the changes.
Contents: BRACKETS | DEDUCTIONS | ITEMIZED DEDUCTIONS | CHILDREN & EDUCATION | ESTATE TAX
New Tax Brackets
The most visible change that took place was a reduction in the marginal tax rates. If you want to see the new updated brackets, you can review them at the Tax Foundation.
The impact of this? Most American families will see a slight reduction in their overall taxes as the marginal rates are lower. Here is how they compare between 2017 and 2018.
Changes To Deductions & The Personal Exemption
One of the biggest changes was the elimination of the personal exemption. To replace it, the TCJA increased the standard deduction for individuals and families. The good news is that the new, higher standard deduction is higher than the original deduction, plus the personal exemption, prior to the TCJA. This should be a positive change for most families. Here is a quick example for illustrative purposes. This is for a single filer:
The downside is that some families will no longer itemize their deductions due to the TCJA. Some estimates show that there will be a reduction in itemized returns somewhere between 50% and 60%. With a higher deduction, your tax bill would still be lower, but it does impact some overall planning strategies.
New Limits On Itemized Deductions
If your itemized deductions exceed your standard deduction, you will continue to file as you have in the past. However, there are some changes to consider:
- The deduction for home mortgage interest is now capped at a mortgage loan of $750,000. Prior to the TCJA, the figure was $1,000,000. Doubtful this affects many people but an important figure nonetheless. Remember, you can only deduct amounts used to “buy, build, or substantially improve the taxpayer’s home that secures the loan.”
- Maybe the biggest limitation in higher tax states is the limit on your SALT (state and local tax) deductions to $10,000. So if your deductions in these areas are greater than $10,000, you no longer get to deduct the amount in excess.
Children & Education
Your kids just got less expensive!
The TCJA increased the child tax credit for each qualified child to $2,000, up from $1,000, and the income levels at which this phases out were more than doubled. The even better news? Up to $1,400 of this credit is refundable. This means that even if you do not owe any taxes, you can still get a refund up to this amount.
Some more good news! Excited yet? 529 college savings plans, historically reserved for college or postgraduate education, can now be used for qualified education expenses at ALL levels. 529 plans can be great savings vehicles, as earnings are tax deferred and qualified distributions (I promise this is an IRS term and not some strange infatuation with the word qualified) are not taxed. Some states even allow for a state income tax deduction for contributions, up to a specified limit, for a 529 plan. Check with your Facet adviser if you have questions about your state’s rules.
Increased Estate Tax Exemption [Federal]
I do not expect this to affect too many people, but I felt compelled to list this update. The estate tax exemption has been increased to $11,200,000 per person (yes, per person) starting in 2018. In theory, a married couple could avoid the federal estate tax even if they are worth $22,000,000. If you are over this threshold, good for you! And call us so we can talk about planning strategies.
And Some Smaller Changes (If You Are Interested)
- Roth recharacterizations are not permitted after October 15, 2018.
- AMT exemption amounts increased and will now be indexed for inflation.
- Penalty for not having health insurance is eliminated beginning in 2019.
- Alimony is no longer deductible and the recipient receives the income tax-free for divorces granted in 2019.
- Medical expense deduction is now only for any expenses over 10% of AGI (up from 7.5%).
Still there? I am impressed.
That was a lot to digest so I will keep the ending short. Please know that your dedicated financial adviser, and the entire team at Facet, are here to answer your questions and to provide guidance where we can. If you have questions, or simply want to talk, please give us a call.