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ACA Individual Mandate Repealed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

Taxable Income	Tax Rate
$0 – $9,525	10% of taxable income
$9,526 – $38,700	$952.50 plus 12% of the amount over $9,525
$38,701 – $82,500	$4,453.50 plus 22% of the amount over $38,700
$82,501 – $157,500	$14,089.50 plus 24% of the amount over $82,500
$157,501 – $200,000	$32,089.50 plus 32% of the amount over $157,500
$200,001 – $500,000	$45,689.50 plus 35% of the amount over $200,000
$500,001 or more	$150,689.50 plus 37% of the amount over $500,000

 

Married Filing Jointly or Qualifying Widow(er)

Taxable Income	Tax Rate
$0 – $19,050	10% of taxable income
$19,051 – $77,400	$1,905 plus 12% of the amount over $19,050
$77,401 – $165,000	$8,907 plus 22% of the amount over $77,400
$165,001 – $315,000	$28,179 plus 24% of the amount over $165,000
$315,001 – $400,000	$64,179 plus 32% of the amount over $315,000
$400,001 – $600,000	$91,379 plus 35% of the amount over $400,000
$600,001 or more	$161,379 plus 37% of the amount over $600,000

 

Married Filing Separately

Taxable Income	Tax Rate
$0 – $9,525	10% of taxable income
$9,526 – $38,700	$952.50 plus 12% of the amount over $9,525
$38,701 – $82,500	$4,453.50 plus 22% of the amount over $38,700
$82,501 – $157,500	$14,089.50 plus 24% of the amount over $82,500
$157,501 – $200,000	$32,089.50 plus 32% of the amount over $157,500
$200,001 – $300,000	$45,689.50 plus 35% of the amount over $200,000
$300,001 or more	$80,689.50 plus 37% of the amount over $300,000

 

Head of Household

Taxable Income	Tax Rate
$0 – $13,600	10% of taxable income
$13,601 – $51,800	$1,360 plus 12% of the amount over $13,600
$51,801 – $82,500	$5,944 plus 22% of the amount over $51,800
$82,501 – $157,500	$12,698 plus 24% of the amount over $82,500
$157,501 – $200,000	$30,698 plus 32% of the amount over $157,500
$200,001 – $500,000	$44,298 plus 35% of the amount over $200,000
$500,001 or more	$149,298 plus 37% of the amount over $500,000