The other day, I was sitting with a client, catching up and planning out the new year when the topic of taxes came up. “Will my taxes go down due to the new tax law?” he asked.
“How much time do you have?”
He looked at me with a nod and said, “All the time in the world.”
Ok. Here we go.
I don’t know. It should for most, but there is a lot of change out there.
First, the tax rates are lower. If you are married and have $250,000 in taxable income, your top bracket would have been 33 percent. Under the new law, it will be 24 percent. So that’s good. All the tax brackets are reduced. The top tax rate is now 37 percent instead of 39.6 percent.
Next, the standard deductions have doubled. With an increase in the standard deduction, most folks won’t have to itemize any more. The only catch is, they took away the exemptions, both personal and dependency. A family of four that used to have a standard married filing joint deduction of $12,600 and four exemptions of $4,050 each is giving up a total of $28,800 in deductions. They will now get the standard married filing joint deduction of just $24,000.
Have I lost you yet? Good, there’s plenty more.
If you do itemize, there are some changes there, too.
Charitable contributions are still deductible, but now cash contributions are limited to 60 percent of AGI instead of 50 percent.
Medical expenses are deductible to the extent they exceed 7.5 percent for all taxpayers (kind of going back to the old rules on this one).
Mortgage interest is limited to the interest on the first $750,000 in acquisition indebtedness. There is no more home equity indebtedness.
State income and property taxes are limited to a combined $10,000. Depending on the size of your house, that is your property tax bill. State Income taxes have become non-deductible.
Oh, and if you lose your sailboat to a pesky band of pirates, you can no longer write it off. The casualty and theft deduction is gone, unless the loss is due to a presidentially declared disaster area, and most pirate thefts aren’t classified as such.
Miscellaneous deductions subject to 2% of your AGI, such as tax preparation, investment expenses, and safe deposit boxes, are no longer around, but the deduction for gambling losses has been expanded to include other expenses that you incur in connection with your game of Texas Hold ‘Em. We’ll need some guidance on this, but it seems other operating expenses could be deductible.
That about covers the schedule A. How about some deductions from the front side of the 1040?
Moving expenses are no longer deductible. So, to all my former students, you can disregard the whole, “You have to take a new job and then move 50 miles farther away from your old home than your old home was from your old job.” You no longer need to know this, but it is still fun to bring it up at parties.
December 31, 2018, now becomes a very important date for divorces. If you are divorced prior to that date, then the payer can deduct alimony and the payee has to include the amount of alimony as income. If you are divorced after December 31, 2018, then there is no deduction on the payer’s side and the payee doesn’t pay taxes on the amount received.
Qualified 529 distributions have been expanded to include higher education and up to $10,000 per student per year for qualifying K-12 expenses. There is still no deduction on the federal side for contributions, but now we can take out expanded distributions without penalty or inclusion as income. We’ll have to wait and see if the states change their rules on deductibility on contributions at the state level.
The AMT phase-out has increased. In theory, this should help ease the burden of the additional tax on some tax payers.
The child tax credit that used to phase out relatively quickly, has been expanded to $2,000 and doesn’t phase out until $400,000 in AGI.
Income from Pass-Through entities will receive a 20 percent deduction at the taxpayer level. Maybe. If you make too much money or happen to be an owner of an entity that is service based, then you might find your deduction limited or completely phased out.
To make a long story a little bit longer, these are just the major changes that affect individuals. It’s safe to say that everyone will be affected by the changes. There are enough changes that it is extremely difficult to say how much your taxes will go down if at all, and it likely will take a few months to fully understand all the details. However, if you have questions or would like to discuss this topic more, please give us a call.
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PLEASE NOTE LIMITATIONS: Please see Important Disclosure Information and the limitations of any ranking/recognitions, at www.fostergrp.com/info-disclosure/. A copy of our current written disclosure statement as set forth on Part 2A of Form ADV is available at www.adviserinfo.sec.gov.