Written By: Davis Barry
The recent changes in tax law, applicable for 2018, have a lot of taxpayers trying to decipher what it means for them. For most, not a lot has actually changed. There are still seven marginal tax brackets for individuals/married couples; you are still incentivized to save for retirement; and using a tax preparer is still prudent.
The 2018 tax brackets for individuals and those that are married filing jointly are below:
|Rate||Individuals||Married Filing Jointly|
|10%||Up to $9,525||Up to $19,050|
|12%||$9,526 to $38,700||$19,051 to $77,400|
|22%||$38,701 to $82,500||$77,401 to $165,000|
|24%||$82,501 to $157,500||$165,001 to $315,000|
|32%||$157,501 to $200,000||$315,001 to $400,000|
|35%||$200,001 to $500,000||$400,001 to $600,000|
|37%||Over $500,000||Over $600,000|
TAX-ADVANTAGED ACCOUNT CONTRIBUTION LIMITS
Given that the tax bill for most Americans will not change significantly, it remains true that one of the most important ways to impact your financial plan is to maximize savings in your retirement accounts. For 2018, annual contribution limits on retirement accounts, such as a 401(k), 403(b) or 457(b), increased by $500 to $18,500. The catch-up contribution remains the same at $6,000, allowing taxpayers age 50 or over to contribute a maximum of $24,500 in 2018.
The annual contribution limit for the Traditional/Roth IRA remains the same as 2017, at $5,500. For taxpayers age 50 or over the catch-up contribution is still $1,000 allowing for a maximum contribution of $6,500 for 2018. Earned income is still needed in order to make a partial or full IRA/Roth IRA contribution.
Health Savings Account (HSA) contribution limits are increased by $50, to $3,450, for singles and by $150 for families, up to $6,900. Taxpayers who are age 55 or older may contribute an extra $1,000. You do not need to have earned income to make an HSA contribution, but must be enrolled in a high deductible health plan, which allows for an HSA.
DEDUCTIONS ON YOUR TAX RETURNS
One of the biggest changes to the new tax law is the doubling of the standard deduction (to $12,000 for singles and $24,000 for those married filing jointly) and elimination of the personal exemption. Due to the increased standard deduction and changes to some specific deductions, far fewer taxpayers will choose to itemize their deductions in 2018. Changes to specific deductions that will be relevant to many taxpayers include:
- $10,000 cap on the deduction for state and local property taxes & income taxes (SALT), for singles and those married filing jointly. High income earners and homeowners will therefore see their deductions limited by this new cap.
- Mortgage interest deduction is limited to acquisition indebtedness of $750,000 (old mortgages are grandfathered in).
- Home equity line of credit interest is no longer deductible, though some exceptions apply.
- For taxpayers that will claim the standard deduction, charitable deductions, which are a “below-the-line” deduction and also show up on Schedule A, will not reduce your taxable income. For those who will still be itemizing, you can donate up to 60% of your income versus 50% in 2015.
- Two strategies that will remain very attractive for those who are charitably inclined will be gifting appreciated securities and Qualified Charitable Distributions (QCD). QCDs are applicable to taxpayers who are age 70.5 or over and subject to required minimum distributions from pre-tax retirement accounts.
- Medical expenses that now exceed 7.5% of a filer’s adjusted gross income (AGI) are deductible. This applies to the 2017 and 2018 tax years only. After that, the threshold will return to 10% of AGI, making this a temporarily expanded deduction.
- All of the 2% miscellaneous deductions, including financial advisory fees, tax preparer fees, and unreimbursed employee business expenses are no longer available.
- Alternative Minimum Tax (AMT) is still with us, but it will affect far fewer taxpayers. The AMT exemption amount has been increased to $70,300 for single filers and $109,400 for married couples filing jointly. The phase-out for this exemption doesn’t start until $500,000 in income for individuals and $1,000,000 for those married filing jointly.
Below are other changes brought in by the new tax law that may affect filers.
- The child tax credit is increasing to $2,000/child, from $1,000 in 2017, and the income phase-out for the tax credit was increased to $400,000, from $110,000 for those married filing jointly. Also, the credit can be claimed to age 17 – up from age 16 in 2017.
- Student loan interest is still deductible up to $2,500/year.
- For divorce decrees after 2018, alimony will no longer be tax deductible to the payer, and if you receive alimony it will no longer be taxed. For divorces finalized in 2018 or earlier, the old rules still apply.
- 529 college savings plans can now be used for K-12 private schooling.
- The penalty for not having health insurance will no longer exist come 2019.
- The estate tax exemption will be doubled to $11,200,000 for each person practically eliminating any worry of owing federal estate tax for most taxpayers. Note, your state exemption may be much smaller.
If you have any questions on the new tax law and how it affects your financial plan, please contact your Financial Strategist.