The ink isn’t dry on the new tax law that Congress has passed, but already questions are flooding in from our clients who wonder how it will affect them. That includes Derek and Linda, who last paid me a visit around Halloween. This hard-working couple from Sandwich was wondering if the new tax changes would benefit them. Now that it’s made its way through Congress, we can help Derek and Linda answer that question.
Well, nothing changes for 2017, obviously. But the new year brings with it a host of sweeping changes to the income tax code that will affect many taxpayers for years to come. It’s the most significant change to the Code since the 1980s. Many of those changes apply to the corporate tax code, but because this is Cutter Family Finance, let’s look instead at how the new tax code will affect your family.
Early on it looked like Congress was going to reduce the number of tax brackets for individual filers. That didn’t change in the final law – there are still seven brackets. What’s changed are the income brackets and their respective rates. Prior to the changes, the rates were 10%, 15%, 25%, 28%, 35% and 39.6%. The new rates are 10%, 12%, 22%, 24%, 32%, 35% and 37%.
A couple married filing jointly like Derek and Linda whose taxable income is $200,000 a year can expect to be in a lower bracket than before – they’ve dropped from 28% to 24%. Almost every income level and tax bracket changes with this new law, so check carefully to see how it may affect you. This will be a tax benefit to many.
One of the most talked-about aspects of the new tax legislation is the increase in the standard deduction. It almost doubles. The new standard deduction for single filers jumps from $6,350 to $12,000, while the new standard deduction for married couples filing jointly rises from $12,700 to $24,000. More than 70% of American taxpayers already use the standard deduction rather than itemize, which makes this a significant change to a lot of people – including those who until now have been itemizing, but are better off now claiming the higher standard deduction.
Unfortunately, the personal exemption has been eliminated. In 2017, taxpayers could claim a $4,050 personal exemption for themselves, their spouse and each of their dependents. That is no longer possible. This will be a tax liability to many.
Initially, lawmakers wanted to get rid of the State And Local Tax (SALT) deduction altogether. Congress didn’t get rid of SALT, but they did significantly reduce it. The law now caps the previously unlimited SALT deduction to $10,000. If you itemize your deductions using Schedule A like Derek and Linda, this may be a tax liability.
The mortgage interest deduction on debt related to the purchase of first or second homes has been lowered from $1 million to $750,000. Also, the deduction for interest on home equity loans up to $100,000 has been eliminated entirely.
Downsizing or moving? If you’re planning to sell your primary home in 2018, you can still exclude up to $250,000 for single filers, or up to $500,000 for joint filers, from the net gains on your home sale. The deduction for moving expenses, however, is gone.
Derek and Linda still have a high-school aged child at home. They will be able to claim the Child Tax Credit in full. What’s more, the law doubles that credit to $2,000 for children under 17. It also expands the entire credit to more people than before by raising the income limit for eligibility from $75,000 to $200,000 for single parents and from $110,000 to $400,000 for married couples. And if you have a non-child dependent at home, there is now a $500 credit available.
Families with 529 savings funds should be aware of significant changes in the new law. Those funds can now be used to pay off up to $10,000 per year for qualified public, private or religious primary or secondary school tuition. Up until now, 529 plans could only be used for college expenses. Families setting aside money for primary education often used lower-cap and less tax-advantaged Coverdell Education Savings Accounts (ESAs).
An important change has also been made for families caring for a child with disabilities. Assets in a 529 fund can be rolled into an ABLE account, a tax-advantaged plan for individuals with disabilities. However, contributions are limited to the 2018 annual gift tax exclusion amount of $15,000 ($1,000 more than 2017). ABLE accounts can be used to pay for housing and transportation costs, assistive technology, health care and personal assistance services not covered by insurance, Medicaid, and Medicare.
A $2,500 student loan deduction stays in place, so do once-contested tax-free tuition waivers for grad students. That’s good news for Derek and Linda’s oldest son Rob, a teaching assistant in Boston.
Tax relief comes for families with significant medical expenses. The new law expands the deduction to medical costs exceeding 7.5% or more of adjusted gross income (AGI). In the past, the threshold was 10%.
Remember how I said at the outset these changes would affect you for years to come? We know how many, at least for now. Seven years. That’s because most of the changes affecting individual taxpayers are temporary and set to expire in 2025. Never do today what you can put off until tomorrow, right, Congress?
Ahhh . . . those Wizards of Washington.
We were also promised a tax return we could file on a postcard. But that’s not happening this year, folks. Taxes are still very complicated, and you should make sure to consult your tax advisor to find out how the new law will affect you. Oh, one last kicker. Tax prep is going to cost you more – the new law eliminates last year’s deduction for tax preparation.
There’s quite a lot to unpack with the new law, and much of it is aimed at businesses. The hope is that the reforms enacted in this legislation will spur the engine of economic growth forward. A rising tide raises all boats!
My message to Derek and Linda is the same to you regarding the new tax law:
Be vigilant and stay alert, because you deserve more.
I want to wish all of you a healthy and prosperous 2018.
Happy New Year!
Jeff Cutter, CPA/PFS is President at Cutter Financial Group, LLC, with offices is Falmouth, Duxbury, and Mansfield. Cutter Financial Group provides private wealth and investment management advice incorporating low risk, low volatility financial strategies. Jeff can be reached at firstname.lastname@example.org.
Cutter Financial Group LLC (“Cutter Financial”) is a registered investment advisor.
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