The most sweeping tax reform legislation in decades was enacted into law at the end of 2017. If you pay federal income taxes, you are likely to see an impact this year. As you plan your 2018 tax strategy, here are five key changes to know about the tax reform law:
- Tax rates and brackets have changed
Federal income tax rates progressively increase as your income rises. These are known as tax brackets. The new tax code reduces most of the ordinary tax rates and adjusts the tax brackets, applicable from 2018 to 2025. However, the number of brackets for individual tax filers and married couples filing jointly remains at seven. For instance, in 2018 the first $19,050 of taxable income for a married couple filing a joint return is subject to a 10 percent federal income tax. For income the couple earns between $19,050 and $77,400, the ordinary tax rate for 2018 is 12 percent, lower than the 15 percent seen under the previous law. The highest ordinary income tax rate, which was previously 39.6 percent, was reduced to 37 percent and starts at $600,000 of taxable income for couples who file jointly. Visit IRS.gov to see the full list of tax rates and brackets.
- Standard deduction is nearly doubled
When you prepare your tax return, you have a choice of either a standard deduction, or itemizing deductions such as mortgage interest, charitable gifts, or state, local and property taxes. Under the new law, more people will use the standard deduction. (Itemized deductions are changing as well – see item number three.) The standard deduction stood at $6,350 for a single taxpayer and $12,700 for a married couple filing a joint return in 2017. Under the new law, the standard deduction has increased to $12,000 for a single taxpayer and $24,000 for a married couple filing a joint return. These changes are effective from 2018 through 2025, unless Congress acts to extend them.
- Changes in itemized deductions
For those who itemize deductions in 2018 (and through 2025), there are some significant changes, even considering the increased standard deduction. Among the most notable:
- The deduction for state and local taxes, including property taxes, is generally limited to a maximum of $10,000 per year. Under previous law, no maximum limit applied.
- The ability to deduct interest on home mortgage remains, but the $1,000,000 debt limit under previous law is generally reduced to a $750,000 debt limit for home mortgages created after December 15, 2017. Also, deductions on interest paid on home equity loans (whether new or existing loans) is no longer allowed. This may make home equity loans less attractive as a borrowing option.
- Miscellaneous itemized deductions, such as investment expenses and tax preparation fees, are no longer allowed.
- Personal exemptions are suspended and child tax credit is increased
Under long-standing tax law prior to the new legislation, individuals could also claim personal exemptions for themselves and their dependents when filing their tax return. That exempted a portion of income from taxes. In 2017, the personal exemption was $4,050 per person. Under the new law, effective in 2018 through 2025, the personal exemptions no longer apply.
If you have children, you may qualify to claim a $2,000 tax credit per qualifying child beginning in 2018 (and through 2025), double what was allowed in prior law. That is a dollar-for-dollar reduction of the taxes owed. It’s expected that more people will be able to take the credits because income limitations have been raised. Another credit of $500 is now allowed for dependents you may claim who are not qualifying children.
- Expanded use of 529 plans
To this point, 529 plans have provided a tax-advantaged way to save money for qualified higher education expenses, such as tuition, room and board, and fees. The new law allows you to withdraw up to $10,000 tax-free per year per child from a 529 plan to help cover the K-12 tuition at a public, private or religious school.
These are only some of the changes that may affect individual taxpayers. Consult with your tax advisor to understand how the new legislation may affect your circumstances. Keep in mind that many of the tax provisions have an expiration date, unless Congress acts to extend them.
Andrew R. Petty, CRPC®, APMA®, is a Private Wealth Advisor with Marlowe, Petty & Associates, a private wealth advisory practice of Ameriprise Financial Services, Inc . He offers fee-based financial planning and asset management strategies and has been in practice for 15 years. To contact him, please call 407-249-4006, visit his website at www.marlowepetty.com or stopover at his office at 10917 Dylan Loren Circle, Suite A, Orlando, FL 32825.
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