TAXES | How Will The 2017 Tax Cuts and Jobs Act Effect You
The 2017 tax reform, aka Tax Cuts and Jobs Act (TCJA) is in effect for our 2018 taxes. Here six important changes to the tax code and how they will impact your 2018 return:
1. Standard Deduction Increases
The standard deduction almost doubles 2018 for all tax payers:
Single and Married Filing Separately 2017: $ 6,350 2018: $12,000
Married Filing Jointly 2017: $12,700 2018: $24,000
Head of Household 2017: $ 9,300 2018: $18,000
The standard deduction is available to all taxpayers who do NOT itemize their deductions on their tax return. In the past, most tax payers with a mortgage itemized their deductions instead of taking the standard deduction.
How the change impacts you: The biggest impact to your tax return is the decision whether to itemize is no longer automatic. Tax payers with average mortgage balances and average charitable deductions, will likely find the standard deduction will lower their tax burden more than itemizing their deduction will. For 2018 taxes, we recommend preparing the return using both standard and itemized deductions, and then filing the return that most effectively manages your tax obligation.
2. Personal Exemption Eliminated
For 2018, taxpayers can no longer claim the $4,050 personal exemption for each of their dependents. Personal exemptions were claimed by taxpayers who itemized their deductions. In the past, discussions as to whether you could “claim” someone as a dependent is related to Personal Exemptions. If you claimed your adult, dependent child, then your itemized deductions were $4,050 higher.
How the change impacts you: Eliminating Personal Exemptions, means there is even less benefit to try and maintain someone as a dependent. This is especially relevant for children who are transitioning from dependents to adulthood. If these children have taxable income, there are a number of benefits for them to file independently. That change can now be made without increasing your tax obligation.
3. Child Tax Credit
The Child Tax Credit, for each qualifying child under the age of 17, doubled from $1,000 to $2,000, for the 2018 tax year. Additionally, the Child Tax Credit now includes a $500 credit for qualified dependents who are over 17.
How the change impacts you: The Child Tax Credit not only starts phasing out at $200,000 and $400,000 AGI for single or joint filers respectively, but it also is primarily limited to dependent children, so this change will impact your children and grandchildren more than it will impact you.
4. Mortgage Interest Deduction Reduced
Taxpayers who purchase a home in 2018 can deduct interest on up to $750,000 in total mortgage debt. Taxpayers with mortgages from before 12/31/2017 can deduct interest on up to $1,000,000 of mortgage debt. The $1,000,000 amount is grandfathered for the life of the mortgage(s).
Interest on home-equity loans (HELOC) is no longer deductible.
How the change impacts you: If your total mortgage debt on your primary and secondary homes is less than $750,000 and if you do not have a balance on a HELOC, then this change not impact you. If your total mortgage debt exceeds $750,000, then we will want to evaluate after-tax impact of any changes to your mortgage debt.
A taxpayer with $900,000 in mortgage debt would want to evaluate the change in both interest rate and tax deductibility before refinancing their mortgage debt. Taxpayers who carry large HELOC balances may consider either refinancing their homes and wrapping their HELOC into their primary mortgage, or using a second mortgage to close out the HELOC.
5. Limited SALT
For taxpayers who itemize, the amount of state and local taxes that can be deducted on their personal tax return is limited to $10,000. Previously, there was no cap. State and local taxes include property taxes and either income or sales taxes.
How the change impacts you: For taxpayers in high-tax jurisdictions like California and New York that itemize their deductions, this change is going to be painful. For taxpayers lower-tax jurisdictions, the impact will not be as dramatic. Property taxes paid on rental properties is still deductible on Schedule E of the tax return for the rental business.
6. Tax Brackets and Rate Changes
The number of brackets does not change, but both the income ranges in the brackets and the tax rates do.
Individual for 2018
10.0% - $0 to $9,525
12.0% - $9,526 to $38,700
22.0% - $38,701 to $82,500
24.0% - $82,501 to $157,500
32.0% - $157,501 to $200,000
35.0% - $200,001 to $500,000
37.0% - Over $500,000
Married/Joint for 2018
10.0% - $0 to $19,050
12.0% - $19,051 to $77,400
22.0% - $77,401 to $165,000
24.0% - $165,001 to $315,000
32.0% - $315,001 to $400,000
35.0% - $400,001 to $600,000
37.0% - Over $600,000
How the change impacts you: These changes are going to impact taxpayers differently depending on their adjusted gross income (AGI). Most taxpayers will benefit from a broader range at what is now the 24% bracket. All taxpayers are going to benefit from the lower rates at each bracket level.
As always, we recommend you consult with your tax advisor to determine how these changes affects your personal circumstances.