On December 22nd President Trump signed a historic tax bill into law. The quick passage left many scrambling to understand whether the new law would impact them. Journalists posted articles that raised additional questions. The result was huge amounts of uncertainty and misunderstanding.
A New York Times poll early December revealed that just 32% of people thought they would get a tax cut under the new tax bill. That number deviates wildly from the Tax Policy Center’s research that found 76% of taxpayers will see tax breaks in 2018.
With all the confusion, we encourage you to focus on changes that impact you. Below is a summary of some of the law’s key points.
New Tax Brackets
The law made adjustments to almost all of the current tax brackets by law reducing marginal tax rates for nearly every tax bracket. You can use this calculator to get an estimate of how the new tax rates may affect your taxes in 2018.
Increased Standard Deduction
In addition to making changes to the tax brackets, the law also changed how taxable income is calculated.
The bill nearly doubled the “standard deduction” increasing it from $6,350 for individuals and $12,700 for married couples to $12,000 and $24,000 respectively. The increase in the standard deduction is partially offset by the elimination of the personal exemption, which was a $4,050 deduction for each person in a household.
The chart below shows how these changes have impacted the deduction amount for individuals and married couples with no dependents claiming the standard deduction.
If you normally claim the standard deduction it is very likely you will end up with a lower tax bill come 2018!
Itemized Deduction Changes
Did you know that only 30% of taxpayers itemize deductions? If you fall into this group here are a few items of note.
If your itemized deductions were previously less than $24,000 as a married couple (or $12,000 as an individual) you’re likely in luck. You will likely not have to file a Schedule A!
If your itemized deduction were more than $24,000 it becomes a bit trickier. There is still a chance that you will have a tax cut, but it is also possible you will see your taxes not change much or even increase depending on the deductions you take.
One of the changes that was very much front and center leading up to the vote was the limitation of State and Local Tax deduction (or SALT) to $10,000 annually. Previously this deduction did not have any limitations and helped dramatically reduce the income of families living in areas with high local and state taxes.
While the mortgage interest deduction also got a lot of press before the vote, the impact on most individuals should be minimal. The mortgage interest deduction limit was reduced from $1,000,000 to $750,000, meaning you will only be able to deduct the interest you pay on a mortgage up to a $750,000 balance. That being said, the new limit will only impact homes purchased after December 15th of 2017, all other homes and mortgages will be grandfathered in under the old $1 million limit.
Interest on home equity loans will no longer be deductible, even for existing lines of credit. Previously interest from loans up to $100,000 could be deducted.
Tax Prep, Investment Management & Financial Planning Fees
One of the deductions that ended up on the chopping block was the deduction for tax preparation, investment management and financial planning fees. If those fees exceeded 2% of your adjusted gross income you could previously deduct them. Starting in 2018 they will no longer be deductible.
But what does all this mean to you?
Big picture, the new tax bill will result in a lower tax burdens for most Americans. According to the Tax Policy Center 76% of taxpayers will see tax cuts in 2018, 15% of taxpayers won’t see a noticeable change (within $100 of their previous tax bill) and just 9% of taxpayers will see tax increases. Of those that will see increases, most will be either larger families, or people who itemize deductions in excess of $24,000. If you are one of the nearly 70% of taxpayers who utilizes the standard deduction, you will most likely see a reduction in your 2018 tax bill.
At Freedman Financial, our clients get the benefit of having us review their tax returns and explore ways to prepare for changes in the tax code. If you need specific tax advice, please refer to a qualified tax preparer.
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