The Tax Cuts and Jobs Act of 2017 begins phasing in for tax year 2018 and beyond, and it’s time to start thinking about how its new provisions, as well as its changes, will affect you and the amount you pay in taxes.

Standard Deductions are Increasing, But It’s Not All Good News

For starters, the standard deductions going forward are basically doubling. However, the amount claimed in personal exemptions may make a real difference here.

For example, a married couple, filing jointly, with no kids would have gotten a $12,700 standard deduction in 2017. Then might also have taken $8,100 in personal exemptions, for a total of $20,800. Suddenly that 2018 $24,000 standard deduction without any personal exemptions doesn’t look quite so generous anymore. Another example: if you were a married couple in 2017, filing jointly, with two kids, you got a $12,700 standard deduction in 2017, plus a possible $16,200 in exemptions, for a total of $28,900 in potential tax-free income. The 2018 $24,000 standard deduction would leave them nearly five grand in the hole compared to previous years. The overall lower tax rates and expanded child tax credit may or may not make up that difference, depending on income level and family size. However, it’s clear that doubling the standard deduction may not be quite the gift it sounded at first. It depends largely on your life situation, in fact.

Let’s Talk about Itemized Deductions

Assuming it still makes sense for you to itemize, you need to be aware of some changes to the itemized deduction rules.

For example, medical and dental expenses are currently deductible only if they total more than 10% of your adjusted gross income. The new tax law lowers that threshold down to 7.5%, retroactive to January 1, 2017. However, the threshold goes back up to 10% again on January 1, 2019. All this may be moot for most people, as spending 7.5% or 10% of your income on health care is unusual for most. Plus, you only get to deduct anything you spend above that threshold, anyway.

Fortunately, there are far better ways to maximize your medical deductions. For example, if you run your own business, a medical expense reimbursement plan may let you deduct 100% of your family’s medical bills as a business expense. And if you’re responsible for picking your own insurance, it’s possible a high-deductible insurance policy coupled with a health savings account may accomplish that same goal. So, though you could deduct whatever portion of your medical bills tops 7.5% of your income, if you structure things well, you can write off all medical expenses instead.

Other itemized deductions affected include state and local taxes, casualty losses due to disaster, mortgage interest, charitable gifts, and more.

The Biggest Change: The 2018 Tax Brackets

Tax brackets are one of the biggest changes in 2018, affecting all taxpayers. Back in 2017, there were seven tax brackets, starting at 10% and topping out at 39.6%. The Tax Cuts and Jobs Act keeps that seven-bracket structure but cuts most of the rates.

Your bottom-line results could be dramatic, or not, depending on how much you earn, how you earn it, where you spend it, and how many people you’re supporting.

 

2018 Tax Brackets

Rate For Unmarried Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over For Heads of Households, Taxable Income Over
10% $0 $0 $0
12% $9,525 $19,050 $13,600
22% $38,700 $77,400 $51,800
24% $82,500 $165,000 $82,500
32% $157,500 $315,000 $157,500
35% $200,000 $400,000 $200,000
37% $500,000 $600,000

$500,000

Restoring What Was Lost: Child Tax Credits

With the old code, the child tax credit was capped at $1,000 per child aged 17 and under. The new rules double the child tax credit to $2,000 per child. They also raise the threshold for phasing out the child tax credit to $200,000 for single filers and $400,000 for joint filers. Bottom line: the new child tax credit rules should restore some lost benefits for some taxpayers.

Request a Strategic Tax Assessment Today

So how are you going to be proactive and strategic with the ways the new tax law affects you for the 2018 tax season? Let’s Talk and to request a strategic tax assessment from one of our Financial Gravity team members and make a plan today!

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