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7 Things to Know About the New Tax Law

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The new tax law (Tax Cuts and Jobs Act) passed in December of 2017 marks the biggest overhaul in the tax code in many years. The impact of these changes is far reaching and will impact most of us in some way.

As we are now over half-way through 2018, this is a good time to look at your tax situation in light of the new tax law and make any necessary adjustments prior to year-end.

Here is a look at seven ways the new tax law may impact you.

1. Lower tax brackets

For most tax payers, the new federal income tax rates will be lower.

Single filers

Tax Rate Income range 2018 taxes Income range 2017 taxes
10% Up to $9,525 Up to $9,325
12% $9,526 to $38,700 NA
15% NA $9,326 to $37,950
22% $38,701 to $82,500 NA
24% $82,501 to $157,500 NA
25% NA $37,951 to $91,900
28% NA $91,901 to $191,650
32% $157,501 to $200,000 NA
33% NA $191,651 to $416,700
35% $200,001 to $500,000 $416,701 to $418,400
37% $500,001 or more NA
39.6% NA $418,401 or more

Source Bankrate.com

Married filing jointly

Tax Rate Income range 2018 taxes Income range 2017 taxes
10% Up to $19,050 Up to $18,650
12% $19,051 to $77,400 NA
15% NA $18,651 to $75,900
22% $77,401 to $165,000 NA
24% $165,001 to $315,000 NA
25% NA $75,901 to $153,100
28% NA $153,101 to $233,350
32% $315,001 to $400,000 NA
33% NA $233,351 to $416,700
35% $400,001 to $600,000 $416,701 to $470,000
37% $600,001 or more NA
39.6% NA $470,001 or more

Source Bankrate.com

As you can see from the bracket in almost every range, the top end of the bracket is a bit higher and generally most income levels are in lower brackets. This means tax savings for most of us starting with the 2018 tax year.

Suggestion – Check the level of taxes being withheld from your paycheck to ensure you don’t come up short and find yourself with a bigger tax bill than you had anticipated.

2. Increased standard deduction

Beginning in 2018, the standard deduction is drastically increased.

  • The standard deduction increases from $6,350 to $12,000 for single filers.
  • The standard deduction increases from $12,700 to $24,000 for those married filing jointly.

This means that fewer people will be able to itemize deductions. It also means that more taxpayers at lower income levels will not owe any taxes.

Partially offsetting the increased standard deduction is the repeal of the personal exemption for 2018. The 2017 amount was $4,050 per eligible dependent, including the tax payer(s). For a family of five, including three dependent children, this would amount to $20,250. The trade-off between the loss of the personal exemption and the increase standard deduction will vary with each person’s situation.

Strategy idea – If the new standard deduction is likely to prevent you from itemizing, it might make sense to bunch deductible expenses into a single tax year, either by accelerating or deferring expenses. Examples of expenses to consider bunching include charitable contributions and eligible medical expenses.

3. SALT reductions

This might be the most controversial provision of the new tax law. SALT stands for state and local taxes. These typically include state and local income taxes as well as property taxes and state sales taxes.

The big change for 2018 is that the deduction for all SALT taxes combined is limited to $10,000. With the higher level of standardized deductions, this limitation may prevent many folks who are used to itemizing deductions from doing so in 2018 and beyond.

For example, if your property taxes are $12,000 annually and your state income tax liability is $8,000, your total deduction for these items will be limited to $10,000. Combined with the higher standard deduction levels you may find yourself unable to itemize deductions going forward.

This provision will likely have the greatest impact in high cost states like California, New York, Illinois, Minnesota and much of the Northeastern part of the country. As many of these are “blue states,” some have speculated that this provision of the new tax law was politically motivated.

Regardless of the motivation, this change is functionally a drop in after-tax income for those impacted. This may be partially offset by the reduced tax brackets and the increase in the standard deduction, but you would be wise to look at your situation as soon as possible to get a true picture of the impact on you.

4. Child tax credit

For families with children, the Child Tax Credit has doubled from $1,000 to $2,000 per child for 2018. Additionally, up to $1,400 of the credit can be refundable if the credit results in a tax refund for you.

The income level at which the credit begins to phase-out has been increased to $400,000 for married couples in 2018, increasing the number of families that will be able to take advantage of this credit. Remember, a tax credit directly reduces the amount of taxes paid and is therefore more valuable than a tax deduction.

The new law also added a $500 credit for other dependent family members, including dependent parents.

As a practical matter, the loss of the personal exemption may offset a portion of the benefit of these increases. There are rules regarding earned income limits and the definition of an eligible child so be sure to understand all the rules and how they might apply to your situation.

5. Retirement plan contributions

Contrary to some earlier versions of the tax bill, the 2018 contribution rates for 401(k) plans, IRAs and other tax-deferred retirement plans was left unchanged. Contributing to a retirement plan provides a tax-break for many and is a great way to save for retirement while your money grows tax-deferred (or tax-free in the case of a Roth account). Be sure to contribute as much as you can for 2018.

6. Mortgage interest deduction

The new tax law limits the amount of mortgage debt against which an interest deduction can be taken. For 2018 and beyond, the ability to deduct mortgage interest is limited to the first $750,000 of mortgage debt. This limit does not apply to mortgages in place prior to 2018.

The ability to deduct interest on home equity lines of credit is now gone as of 2018, unlike with mortgages existing home equity lines were not grandfathered. The exception to this is for home equity debt that is specifically used for home improvement purposes.

7. Divorce 

For those couples contemplating divorce, the new tax law brings a huge change. For divorces finalized after 2018, the alimony payments will no longer receive a tax deduction for those making the payments. This will potentially make alimony payments more expensive for the paying spouse and could result in lower alimony payments for the spouse receiving them.

The implications are potentially huge for the spouse receiving the payments and could place many of them in an adverse financial situation going forward. For couples thinking about a divorce, they should consider finalizing the process in 2018 if possible.

The bottom line

These are just some of the changes contained in the new tax law. There are provisions impacting businesses large and small, as well as a number of other provisions impacting individuals in various situations. This is a good time to sit down with your tax or financial professional to see what impact the new rules will have on your taxes and your financial planning.

One thing to keep in mind. Most of the changes enacted by these new rules are set to expire after 2025, they aren’t permanent.

Not sure how the new tax rules will impact your financial planning? Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed advice about your situation.

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