Biggest changes: Standard deduction has been increased from 6,350 for individuals and 12,700 for couples to 12,000 for individuals and 24,000 for couples.
More people will be able to use the standard deduction vs the itemized deduction.
Mortgage Interest and Charitable Contributions
Other deductions will be far less important such as mortgage interest deduction and charitable contributions.
You won’t be getting a tax break as much on mortgage interest and charitable contributions, this can make charities nervous.
Should you itemize or not in 2018? Many people will choose not to itemize because the standard deduction in 2018 is so much bigger than before.
State, local income and property taxes
If you do itemize, there will be limits for state and local income and property taxes, in 2018, the limit is $10,000 and there wasn’t a limit before on these.
Child tax credit
The child tax credit has been doubled to 2k from 1k. Income limit has also increased. In 2017, it was 110k for a joint filer, now it’s close to 400k for a joint filer, so more people will be able to take the child tax credit deduction.
Mortgage interest deduction
As of 2017, you were allowed to take the mortgage interest deduction if your loan was $1 mil or less, in 2018, it’ll be only 750k. This new law will only be applicable for people who obtain their new mortgages in 2018, if you already have the mortgage previous to 2018, there is no impact to you.
Home equity loans and home lines of credit
In 2018, the interest on home equity loans and home lines of credit will no longer be deductible even if you already have them, so you will no longer be able to take the interest deduction.
Reevaluate what your options are: Do you keep your home equity loan? Should you combine with your first loan?
In 2017, 529 plans were only for qualified higher education expenses, now they are can be used for qualified expenses for k thru 12. Even though you can use these funds sooner to cover educations expenses for a child, the best option might be not to use it for this purpose because the money has not had enough time to grow in this tax deferred account.
In 2018, you won’t owe federal estate taxes unless you have an estate of greater than 11.2 mil and if you are married it’s 22.4 mil. Fewer people will owe estate taxes as a result of this new tax law.
Roth Ira Conversion
A Roth Ira conversion is where you can convert a traditional IRA to a Roth. You have to pay taxes at the time you convert. So, let’s say you paid taxes on 10k of the Roth balance at the time you converted and the market went down after you converted. Your Roth balance decreased to 8k but you paid taxes on 10k worth of it before. This is not a good thing. In this case, you were able to fix this problem by what is called “recharacterize”. Recharacterize is when you turn the Roth back into a Traditional Ira so you could undo or reverse the conversion. You can longer use this loophole as of 2018.
As of 2018, kids under 24 who have unearned income will pay the same rate as trust.
Corporate Tax Rate
Federal rate on corporate income will go down from 35% to 21%.
Small businesses often referred to as “pass through”, sole proprietor, partnership, LLC, S-corps will get a 20% deduction to their income. This could be a significant tax cut for them.
Starting in 2019, alimony will not be tax-deductible and the recipient will no longer have to pay taxes on the money they receive.
Flexible Spending Accounts
FSA a way to put pretax funds away for qualified medical expenses. The contribution limit was increased from $2,600 to $2,650 in 2018. These funds could be used for medical expenses not covered by your medical insurance such as co-pays, deductibles, dental and vision care. You do have to spend it by the end of the year. Use it or lose it!
Health Savings Account
A HSA account is for individuals who have a high deductible medical insurance plan. Families can put away $6,900 in 2018 in this account, versus $6,750 in 2017. Contributions are 100% tax deductible. The money you put in these accounts is not taxed, the money you take out is not taxed as long as you are using it for qualified expenses and potential investment gains on this money is also not taxed.
There you have it folks, these are some of the most relevant tax law changes that will affect us, best of luck in 2018 managing your taxes! Always seek advice for your particular tax situation, knowledge is power.
Thank you Ric Edelman for helping us understand these new tax law changes.