Making Sense of the New Tax Laws
That’s right “laws.” Plural.
A bill was passed last fall (and largely overlooked in the media) which was written specifically to help anyone in areas affected by hurricanes Harvey, Maria or Irma. If you pay to repair damage from those storms by the end of 2018, tell your tax preparer and keep your repair receipts.
Historically, few people have been able to deduct storm damage because the repairs were only deductible as an itemized expense and only to the extent such losses were not reimbursed by insurance and exceeded 10% of Adjusted Gross Income (AGI). This new emergency relief law means you can probably deduct storm related repairs which exceed $500 whether you itemize or not.
…new emergency relief law means you can probably deduct storm related repairs which exceed $500 whether you itemize or not.
The Tax & Jobs Act
The tax news garnering most of the attention was the Tax Cuts & Jobs Act signed into law on December 22, 2017. The new rules lower tax bills for most households but it does not simplify the tax code. The conference report reconciling the House and Senate versions was 1,097 pages long. Fear not, we are here to help you make the best choices for your family. Over the course of 2018, we will be available to help you zero in on the provisions of the tax code that affect you. Much of the law, such as provisions affecting small businesses, does not directly affect the personal taxes of most individuals so we will focus on some of the provisions we think will be applicable to many of our clients.
All taxpayers are affected by new brackets and rates. We have reproduced the charts for married couples who file jointly and for single taxpayers. These new tables eliminate the so-called “marriage penalty” for couples making less than $600,000. The tables for the less often used “Head of Household,” “Married Filing Separately,” and “Trusts & Estates” can be found here .
Married Filing Jointly
If taxable income is: The tax is:
Not over $19,050 10% of taxable income.
Over $19,050 but not over $77,400 $1,905, plus 12% of the excess over $19,050.
Over $77,400 but not over $165,000 $8,907, plus 22% of the excess over $77,400.
Over $165,000 but not over $315,000 $28,179, plus 24% of the excess over $165,000.
Over $315,000 but not over $400,000 $64,179, plus 32% of the excess over $315,000.
Over $400,000 but not over $600,000 $91,379, plus 35% of the excess over $400,000.
Over $600,000 $161,379, plus 37% of the excess over $600,000.
If taxable income is: The tax is:
Not over $9,525 10% of taxable income.
Over $9,525 but not over $38,700 $952.50, plus 12% of the excess over $9,525.
Over $38,700 but not over $82,500 $4,453.50, plus 22% of the excess over $38,700.
Over $82,500 but not over $157,500 $14,089.50, plus 24% of the excess over $82,500.
Over $157,500 but not over $200,000 $32,089.50, plus 32% of the excess over $157,500.
Over $200,000 but not over $500,000 $45,689.50, plus 35% of the excess over $200,000.
Over $500,000 $150,689.50, plus 37% of the excess over $500,000.
The rates in these tables result in less taxes owed than would be the case for the same level of taxable income under the prior law. While most people will pay less in taxes, some taxpayers will pay more because of the way “taxable income” is now determined. Taxable income was calculated as gross income less personal exemptions and the greater of itemized deductions or the standard deduction.
Now with the new law, the standard deduction is more than doubled to $12,000 for single filers and $24,000 for joint filers. However, due to the elimination of the personal exemptions, some larger families will see an increase in taxable income despite the larger standard deduction. The larger standard deduction will also mean fewer people will itemize. This is not necessarily a bad thing considering you get the standard deduction even if you do not actually spend money on deductible items.
The other alteration to calculating taxable income is changes to itemized deductions. Three changes that affect many of our clients may increase the amount of itemized deductions that lower taxable income.
First, taxpayers who incur medical expenses can deduct unreimbursed expenses to the extent that they exceed 7.5% of Adjusted Gross Income (AGI) instead of only those expenses that exceeded 10% of AGI. This provision only applies up to tax year 2019, but it is also one of the few retroactive provisions in the new law. The lower 7.5% threshold will also be used for 2017.
This provision only applies up to tax year 2019, but it is also one of the few retroactive provisions in the new law. The lower 7.5% threshold will also be used for 2017.
Second, charitable contributions of cash to public charities of up to 60% of AGI in 2018 can be itemized. The prior limit was 50%. Excess donations can be carried forward. Some retirees should consider one possibility in light of the larger standard deduction. Many IRA owners over 70½ will be better off donating directly from their IRA rather than writing a check. The direct donation always results in a 100% tax deduction from gross income.
The third helpful change is the elimination of the “Pease Limitation.” This reduced the amount of itemized deductions for taxpayers with AGIs over a certain threshold (in 2017, individuals over $261,500 of AGI and married couples over $313,800).
Three changes that affect many of our clients may decrease the amount of itemized deductions which may increase income.
First, the amount of state and local taxes (dubbed SALT) that can be itemized is capped at $10,000. This SALT limit applies to the sum total of all of these taxes and includes state income taxes, sales taxes, and property taxes.
Second, some items that were deductible as miscellaneous itemized deductions are no longer deductible. This includes tax prep fees, unreimbursed employee business expenses, and investment advisory fees. Fortunately, investment advisory fees still receive tax-free status for retirement accounts and IRAs.
Third, interest paid on a mortgage is only deductible for the first $750,000 of the mortgage. The limit used to be $1,000,000. Existing mortgages larger than $750,000 are grandfathered and not affected. However, the debt must exist for “acquisition debt” used to “acquire, build or substantially improve” a primary residence. You cannot use a home equity loan to pay off credit cards or to buy a car and deduct the interest.
Most Changes Are Temporary
Most of the provisions that apply to individuals and families lapse after 2025. This includes all the items mentioned above as well as the doubling of the estate tax and gift tax exemption to $11.2 million per person. Also notable is the ability to tap a 529 College Savings Plan for up to $10,000 tax free per student, per year to pay for public, private, or religious primary or secondary school expenses. Prior law only allowed tax-free treatment for qualified college-level expenses.
Proposals were being leaked daily, so it is no wonder reports about the new tax code could be stress inducing.
The item above about mortgage interest prompts us to mention that many media outlets reported mortgage interest would no longer be deductible at all. Proposals were being leaked daily, so it is no wonder reports about the new tax code could be stress inducing. Don’t let that happen to you. If you have a question, give us a call and know that we have already created some analytic tools to help assess exactly how the new provisions will affect you given your unique circumstances. Rest assured, when we give advice to clients, we will incorporate the new rules into those discussions.
News & Notes
New higher contribution limits for retirement accounts in 2018: The IRS announced the official numbers for a slew of new thresholds and limits which vary every year based on inflation adjustment provisions. With inflation low, changes were minimal or non-existent. For instance, for the third consecutive year, the maximum contribution to an IRA remains $5,500 ($6,500 if age 50 or older). However, the maximum employee contribution to a 401(k) increased by $500 to $18,500 ($24,500 if over age 50). For a more extensive list of limits applied to retirement accounts see: https://www.irs.gov/newsroom/irs-announces-2018-pension-plan-limitations-401k-contribution-limit-increases-to-18500-for-2018.
Health Savings Account contribution limits raised: For those with qualifying high-deductible health insurance plans, the 2018 annual contribution limit individuals with single coverage can contribute to a health savings account is $3,450, an increase of $50 from 2017. For those covered under qualifying family medical plans, the limit is $6,900 (up from $6,750 in 2017). Taxpayers 55 or older in 2018 can contribute an additional $1,000 to those limits.
No change to treatment of capital gains: All the rates and thresholds under the 2017 rules were retained, including the tax-free nature of long term gains for single taxpayers with up to $38,600 and joint filers with $77,200 of taxable income.
Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.
The Team at Moisand Fitzgerald Tamayo, LLC
Moisand Fitzgerald Tamayo, LLC is an Orlando, FL and Melbourne, FL based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between.
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