"...that's good news, but there is a catch..."
Hi I’m Mike Frontera and welcome to another edition of Retirement Insights. Happy 2018 to you and with the new year we have a new set of tax rules to live by. That’s right. Arguably the most major tax reform legislation is now law. And depending on what news channel you watch, it’s probably hard to tell if you should be jumping for joy or jumping over to another country! Well I’m going to cut through the political chaff (we’re not permitted to use stronger language than “chaff”) and give you what I see as the 5 changes that impact the largest number of my clients.
A disclaimer: These 5 changes are not an exhaustive list by any stretch. I will not be discussing corporate taxes,
estate taxes, alternative minimum taxes, and a bunch of other taxes that have changed as a result of this legislation. Also I am not a tax adviser. Please consult your tax adviser in all tax-related matters. Whew, ok that was a bit taxing. Hopefully you’re still with me….and if you are, let’s get to the list!
Change #1: Bracket changes
For most folks, this is a source of real tax savings. Let’s have a look at the 2017 versus 2018 brackets side-by-side. This is a handy chart that I found on businessinsider.com1.
First, you’ll see with the married chart, up to your first about $19,000 of taxable income, your rate stays the same at 10%. Next, we have a fairly large swath of income that goes up to $75-ish (now about $77,000)
that went from 15% down to 12%. On that chunk of income there, folks could save about $1700-1800 with that lower rate.
On the next block of income, let’s say from roughly $75,000 - $150,000, your income tax rate is again about 3% lower. That could provide another over $2000 off your tax bill. Now it starts to get a little messy as the income moves higher but you’ll see that in no case (other than a tiny sliver of income between $400,000 and $415,700) would you be in a higher tax rate than you were before. So this is a big spot for taxpayers to save money.
Now, if you file individually, the new brackets for the most part follow the “same or lower” corresponding tax rate
from 2017. But for those higher income earners, that’s not necessarily the case. You’ll see that if your taxable income exceeds $157,500 you jump up to the 32% rate, whereas in 2017, you would still be at the 28% rate until you hit $191,651. And once you’re over $200,000 of income you’re already at the 35% rate, whereas before you were still at the 33% rate until $416,700 of income. Again, though, most people will save money on the rate of income that they’re taxed upon.
Change #2: Standard deduction and exemptions
Here is another area where most people will find tax savings but not as much as it may seem at first. As the bill promised,
standard deductions have nearly doubled. Compared to 2017, single filers go from $6350 to $12,000 as their standard deduction. Married couples filing jointly go from $12,700 up to $24,000.2,3 That’s good news—but there is a catch. Personal exemptions, of which most tax payers received $4050 for each person last year, have gone away. So right off the bat, most married couples went from taking $12,700 plus two personal exemptions of $4050, equals $20,800 off of their income to now just a flat $24,000. $20,800 to $24,000 is great- it’s just not a doubling of the deduction. Eligible taxpayers with dependent children
could previously take a personal exemption of $4050 for each child. That’s gone too. And of course, with the higher standard deduction, the threshold at which you are able itemize is that much tougher to reach.
Change #3: Child tax credit
I just mentioned that most tax payers are going to lose that personal exemption of $4050 that they got last year for each dependent child. That is true, but this will be made up for a lot of taxpayers with an enhanced child tax credit. This credit has gone from $1000 to $2000 per child4. And remember, a credit is a dollar-for-dollar reduction on the taxes owed, as opposed to the exemption, which is just a tax deduction
Now, like most of the goodies in the tax code,
there are income phaseouts of this credit- and other caveats. The most important caveat is that if your child is 17 years or older at the end of the tax year, you don’t qualify! This hurts those with dependent children in college. You used to get a personal exemption for them but remember, those went away. Now there is a bit of a patch there-- the family tax credit (different credit) is $500. And that can be used for any dependent regardless of age. Again, phaseouts apply here at higher income levels.
Like some of the other tax changes, you may save money here or it may cost you, depending on your children’s ages and your income. Generally speaking, families with more modest income and younger children will make out best here.
Change #4: Limit of SALT
While your doctor may recommend that you limit your SALT, it’s not as helpful when doing your taxes. Sorry, I couldn’t help myself there.
The limitation of the SALT, or State and Local Tax, deduction has been one of the hottest issues here locally, since we in NY as tax payers, we tend to have a lot of SALT in our tax diets! For 2018, state and local income tax deductions are capped at $10,0005. No problem for those in states that have no income tax and low property taxes. But here in NY, many tax payers easily surpass that threshold. This is an area of great concern to tax payers here and in other high-income tax states. In fact, state officials in some of these states are reportedly trying to
find workarounds to avoid the loss of this deduction to their citizens6. Will they be successful? Who knows?
Change #5: Deductions
This is a major change and I’ll start with the most impactful of them. Home Equity Loans. Prior to tax reform, home equity loan interest was deductible on loans up to $100,000 (or $50,000 if you were married and filing separately)7. This ends in 2018. The worst part is this affects new and existing loans. If for example you had a $100,000 home equity loan at 4% interest, that $4000 of interest that you were able to take off your taxes last year is gone. This effectively makes borrowing from your home that much more expensive for those affected.
The next most major change is alimony. Marital support payments have historically
have been tax deductible by the payer of the alimony and taxed at a 15% tax rate by the receiver. The changes in tax reform will provide no tax deduction for the payer. On the other hand, the receiver of the alimony will get their support tax-free8. The good news (at least for those paying alimony) is that this change is not slated to go into effect until 2019. Which means that we have a year where soon to be divorcees could either be rushing to get their divorce finalized…or dragging their feet!
Finally, there are the loss of the miscellaneous deductions that typically have to exceed 2% of adjusted gross income threshold and those include: unreimbursed employee expenses, job travel, union dues, tax preparation fees and more9.
A couple silver linings though. Medical expenses are once again
deductible if they exceed 7.5% of your adjusted gross income whereas last year they had to exceed 10% for most taxpayers. And you’ll also be able to deduct charitable donations made in cash on up to 60% of your income rather than the 50% that it was before. Though with some of these changes, New Yorkers may not have a lot of extra money handy to donate.
Again, this is by no means an all-inclusive list of changes in the Tax Cuts and Jobs Act. Many people will benefit from the changes, and some people won’t. You will likely need a thorough analysis of your situation to see how it affects you specifically. Oh, and by the way, with the exception for alimony, all of these changes are slated to sunset and revert back to 2017 law on January 1, 2026.
Do you have questions for me? Let me know! Give me a call me at
(518) 612-1060, or send me an email at email@example.com. Do you follow me on Facebook? I think that you should! You’ll see videos like this, blog and article shares on everything retirement planning. Once again, thank you for joining me. See you next time.