The new tax law passed by Congress should send tax preparers into a scramble, helping taxpayers understand how 2018 will be different from 2017. Early estimates and projections show the largest impact will not be from the changing tax rates, but instead from the new tax deduction rules. Specifically, the doubling of the standard deduction and the limitation of common itemized deductions. Here are the highlights:
Standard Deduction Increases
Single and Married Filing Separately: $12,000
Married Filing Jointly: $24,000
Head of Household: $18,000
Additional standard deduction for people age 65 and older (or who are blind) is $1,300 for each married taxpayer or $1,650 for unmarried taxpayers.
Personal Exemption Eliminated
Taxpayers can no longer claim the $4,050 personal exemption for each of their dependents. This will obviously negate some of the additional standard deduction noted above.
Child Tax Credit Rises
The Child Tax Credit increases in value from $1,000 to $2,000. There’s also a new $500 credit for non-child dependents. This may seem negligible, however a tax credit can be far more valuable than a tax deduction. For example, for those in the 24% marginal tax bracket, a $1,000 tax credit is equivalent to a $4,167 tax deduction.
State and Local Tax Deduction Cap
Taxpayers can only deduct up to $10,000 in state and local income taxes. Previously there was no cap. For those paying state income taxes (Oregon and California residents beware), this cap could result in a huge differential in tax bills. For example, if you earn $200,000 and pay roughly $20,000 in Oregon income taxes, plus $12,000 in property taxes, your deduction is only $10,000 in 2018 compared to $32,000 in years past. This is the equivalent of losing the entire deduction for your 401(k) deferral!
ACA Individual Mandate Repealed
Beginning in 2019, individuals will no longer receive a tax penalty for foregoing health insurance coverage throughout the year.
Mortgage Interest Deduction Drops
The ability to deduct mortgage interest remained after much discussion of it being removed. However, mortgage balances over $750,000 will not receive deductions for the interest on amounts over this threshold. The previous limit was $1,000,000.
Additionally, the interest deduction on home-equity loans is eliminated.
2018 Income Tax Brackets
Although most taxpayers will see lower tax rates, the loss of the state and local tax deductions could still mean a tax increase. It’s important to create a tax plan and consult your advisor to discuss ways to navigate the new tax law.
The new tax law passed by Congress should send tax preparers into a scramble, helping taxpayers understand how 2018 will be different from 2017. Early estimates and projections show the largest impact will not be from the changing tax rates, but instead from the new tax deduction rules. Specifically, the doubling of the standard deduction and the limitation of common itemized deductions. Here are the highlights:
Standard Deduction Increases
Single and Married Filing Separately: $12,000
Married Filing Jointly: $24,000
Head of Household: $18,000
Additional standard deduction for people age 65 and older (or who are blind) is $1,300 for each married taxpayer or $1,650 for unmarried taxpayers.
Personal Exemption Eliminated
Taxpayers can no longer claim the $4,050 personal exemption for each of their dependents. This will obviously negate some of the additional standard deduction noted above.
Child Tax Credit Rises
The Child Tax Credit increases in value from $1,000 to $2,000. There’s also a new $500 credit for non-child dependents. This may seem negligible, however a tax credit can be far more valuable than a tax deduction. For example, for those in the 24% marginal tax bracket, a $1,000 tax credit is equivalent to a $4,167 tax deduction.
State and Local Tax Deduction Cap
Taxpayers can only deduct up to $10,000 in state and local income taxes. Previously there was no cap. For those paying state income taxes (Oregon and California residents beware), this cap could result in a huge differential in tax bills. For example, if you earn $200,000 and pay roughly $20,000 in Oregon income taxes, plus $12,000 in property taxes, your deduction is only $10,000 in 2018 compared to $32,000 in years past. This is the equivalent of losing the entire deduction for your 401(k) deferral!
ACA Individual Mandate Repealed
Beginning in 2019, individuals will no longer receive a tax penalty for foregoing health insurance coverage throughout the year.
Mortgage Interest Deduction Drops
The ability to deduct mortgage interest remained after much discussion of it being removed. However, mortgage balances over $750,000 will not receive deductions for the interest on amounts over this threshold. The previous limit was $1,000,000.
Additionally, the interest deduction on home-equity loans is eliminated.
2018 Income Tax Brackets
Although most taxpayers will see lower tax rates, the loss of the state and local tax deductions could still mean a tax increase. It’s important to create a tax plan and consult your advisor to discuss ways to navigate the new tax law.
Single
Married Filing Jointly or Qualifying Widow(er)
Married Filing Separately
Head of Household