Understanding the New Tax Law and How it Might Impact You*
The new tax law passed in late 2017 includes the most sweeping overhaul of the U.S. tax code in a number of years. The changes are wide-spread and will impact most of us in some fashion. Here are some comments about several of the provisions that are likely to impact many of you.
New tax brackets
Generally, the new tax brackets for single filers and those who are married filing jointly are lower by one to three percent at most income levels. This can add up and is a tax break for many of you. (1)
A key component of the new tax law is an increase in the standard deduction for 2018 and beyond. The standard deduction for single filers increases from $6,350 to $12,000. This increases for those married filing jointly from $12,700 to $24,000.
The main implication will be a reduction in the ability to itemize deductions for some. For married couples who might have $20,000 in expenses that could be itemized in past years, it will make more sense just to claim the standard deduction. This of course benefits those whose deductible expenses would normally fall short of the $12,000/$24,000 thresholds.
The implication is that fewer people may be able to itemize deductions going forward. For example, if a married couple previously itemized with $20,000 of deductible expenses they are now better off taking the standard deduction.
Related to this, the personal exemption has been eliminated as part of the new tax rules.
This is perhaps the most controversial provision of the new tax law. SALT stands for state and local taxes, including property taxes as well as state and local income taxes. The new rules limit your deduction to $10,000 combined for all these taxes. (2)
This will make the cost of home ownership more expensive for those with high property taxes and makes the cost of living in high tax states more expensive as well. Residents of California, New York, Minnesota, Illinois and others will be particularly hard-hit by this change.
Child tax credit increases
Tax reform increased the credit from $1,000 to $2,000. This now includes a provision for parents who don't earn enough to pay any tax to claim up to $1,400 in credits. Remember a credit is a direct reduction in the amount of tax that is due, which is more valuable than a tax deduction.
The income levels for eligibility to claim the credit have been increased to $400,000 from $110,000 for a married couple filing jointly. All good news for parents. (3)
Mortgage interest deduction
Beginning in 2018, the interest on new mortgages will only be deductible for the first $750,000 of mortgage debt. Mortgages already in place are not impacted by this change. This will serve to make the cost of home ownership more costly for many in high cost areas.
Interest on home equity lines of credit (HELOC) are no longer deductible effective in 2018. There is no grandfathering for existing HELOCs. This makes this type of borrowing more costly for those with these lines in place and for those who might be considering opening one. (4)
For divorces finalized after 2018, alimony payments will no longer be a tax deduction for the ex-spouse making the payments. This change may serve to reduce the level of settlements and could ultimately hurt both parties. Those couples contemplating divorce might consider finalizing things in 2018 if possible. (5)
Alternative Minimum Tax (AMT)
The exemption for the alternative minimum tax (AMT) has been increased from $54,300 to $70,300 for individuals and from $84,500 to $109,400 for married couples. The exemptions phase out at $500,000 for singles and at $1 million for married couples. This subjects fewer taxpayers to this tax that has increasingly hit the middle class. (6)
529 Savings Plans
Parents can now use 529 college savings accounts to cover the costs of elementary and high school expenses. This can help those who send their kids to private schools. These plans are state run and often affiliated with major mutual fund companies. Previously, 529 funds could only be used for college and other post-high school educational expenses. (7)
Implications for you
The list of changes in the tax rules is far from complete and each of you should review the new law and consult a tax professional if needed to see how the changes impact you. Many of these provisions will take some planning to maximize their benefit or minimize their impact on you. Also note many of the changes in the new rules are not permanent with many expiring after 2025.
*All content provided in this blog is supplied by Roger Wohlner and is for informational purposes only. Barclaycard makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.