AKA: “Just give me the low-down”

As you have heard by now, Congress passed a new tax bill that goes into effect 2018 until 2025, when it will need to be renewed. Many of you are probably asking yourselves how you will be affected, if at all. While the bill includes a plethora of changes, both on the business and personal side, we are going to focus on the most prominent ones that affect you on the personal side.
We will provide some examples of how a family, couples, or singles may save on taxes at the end.

Overview

  • New Standard Deduction and Repeal of Personal Exemptions
  • Child tax credit and the phase outs have increased
  • The marginal tax rate is lowered for all tax brackets and the income bracket range is wider
  • Common Deductions
    • Alimony
    • Home Interest and Mortgage deduction
    • Property Tax deduction
    • Medical expenses
    • Moving expenses
  • Annual gift tax amount increased from $14,000 to $15,000
  • Federal estate tax, GSST, & gift tax exemptions all increased from $5,490,000 to $11,000,000

What Should I Do if My Tax Bill is Lower in 2018?

After digesting this, if you think that you will be paying less in taxes for 2018, you may want to speak with your accountant and/or adjust your W-4 with your employer so that more income comes home every pay period. Here is the new W-4 calculator from the IRS.

https://www.irs.gov/individuals/irs-withholding-calculator

STANDARD DEDUCTION & PERSONAL EXEMPTIONS

Standard Deduction Old Law New Law

Standard Deduction

  • Single (S)
  • Married Filing Jointly (MFJ)
  • Head of Household (HoH)

Old Law

  • 6,350
  • $12,700
  • $9,350

New Law

  • $12,000
  • $24,000
  • $18,000

All Personal exemptions ($4,050 per person) were repealed

CHILD TAX CREDITS

Child Tax Credit is now $2,000 per child under the age 17 (increased from $1,000 per child)

  • Phaseout MFJ $400,000
  • Phaseout S $200,000

*Additional Credit $500 for non-child dependent; i.e. elderly & disabled dependents.

MARGINAL TAX RATES

Married and Filing Jointly

New Tax Cuts and Jobs Act
Previous Law (now replaced)

Tax Rate
10%
12%
22%
24%
32%
35%
37%

On Income of
$0-$19,050
$19,050-$77,400
$77,400-$165,000
$165,000-$315,000
$315,000-$400,000
$400,000-$600,000
$600,000+

Tax Rate
10%
15%
25%
28%
33%
35%
39.6%

On Income of
$0-$19,050
$19,050-$77,400
$77,400-$156,150
$156,150-$237,950
$237,950-$424,950
$424,950-$480,050
$480,050+

Single (Unmarried) Filer

New Tax Cuts and Jobs Act
Previous Law (now replaced)

Tax Rate
10%
12%
22%
24%
32%
35%
37%

On Income of
$0-$9,525
$9,525-$38,700
$38,700-$82,500
$82,500-$157,500
$157,500-$200,000
$200,000-$500,000
$500,000+

Tax Rate
10%
15%
25%
28%
33%
35%
39.6%

On Income of
$0-$9,525
$9,525-$38,700
$38,700-$93,700
$93,700-$195,450
$195,450-$424,950
$424,950-$426,700
$426,700+

Note: tax rates shown are marginal, meaning your income at each level is taxed at that rate. Putting aside other variables for a moment (such as deductions/exemptions, capital gains that are taxed at a different rate, AMT/Pease, Medicare Net Investment Income Tax, etc.) a household earning $240,000, for example, under the new law would have a federal tax due of $46,179, or an effective tax rate of 19.24%, less than it’s marginal tax rate of 24%.

COMMON DEDUCTION CHANGES

Alimony payments were previously deductible to the paying spouse, and taxable income to the receiving spouse. In the future, any divorce or separation instrument dated after December 31, 2018 will no longer permit such deductions/taxation.

Mortgage interest deductibility is also changing. For new mortgages taken out after December 15, 2017, only the interest attributable to the first $750,000 of debt principal is deductible, and now only for “acquisition indebtedness” (defined as mortgage debt used to acquire, build, or substantially improve a primary residence).

  • Any existing mortgages will retain their deductibility of interest on the first $1,000,000 of debt principal, and any refinance of these existing mortgages will also retain this same $1 million debt principal limit. Any debt added to the refinance, however, would not be eligible; only the original remaining principal.
  • Home equity debt is no longer deductible, for new or existing mortgages.

Property taxes were previously combined with income/sales tax for deductibility and were not directly limited in amount. Now, those itemizing deductions will no longer be able to deduct more than $10,000 per year in aggregate local taxes, including state/county/city income, property, and sales taxes.

Medical Expenses are subject to:

  • 7.5% AGI floor for 2017 & 2018
  • 10% AGI floor for 2019 and beyond

The Moving Expenses deduction/exclusion has been repealed (except for active duty military). The ability for employers to pay for moving expenses tax free is also repealed, so this form of compensation will now be taxable income.

REAL WORLD EXAMPLES

http://www.taxpolicycenter.org/sites/default/files/publication/151341/updated_effects_of_tcja_act_on_representative_families_final.pdf

This link will connect you with 5 different scenarios (Married with kids, Single parent, Single business owner, high income couple, etc.) so that you can see the various savings that may be most similar and impactful to you.

As always, your Allgen Team is here for you if you have questions about any of this or how you may be affected. We look forward to continuing to serve you in reaching your financial freedom.

Written by Teresa Talton, CFP® Professional with Allgen Financial Advisors, Inc.

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