By Heather Tweedlie

Whether you are preparing your taxes yourself or employing a tax professional, your 2018 tax return will likely look different than in years past. The Tax Cuts and Jobs Act (TCJA) in effect as of January 2018, contains over 400 pages of changes and revisions to the existing tax code. While the TCJA changes affect both individuals and businesses, we have selected key provisions that we believe are most likely to affect you as an individual in the coming years. Most of these individual tax provisions will sunset and revert to pre-existing law after 2025. Until then, however, it’s essential to consider these changes when determining your tax strategy and how they fit into your overall financial plan and goals.

Income Tax Brackets and Rates

Under the new tax law, the federal tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, 37%, depending on your income level and filing status. These new brackets are in effect from 2018 through 2025.1

It’s important to know that the income limits associated with each tax bracket are subject to change to account for inflation. The chart below is based on income limits for your 2018 tax filing:

How this will affect you

While there are still seven tax brackets, rates have decreased overall. Because of these rate changes, you should talk to your financial advisor and tax professional to determine if it might be advantageous for you to defer income. You should also review income streams (i.e. wages, pensions, Social Security, retirement accounts, etc.) where you have established a federal income tax withholding rate to ensure you are not over or underestimating your tax liability.

Exemptions and Deductions

Exemptions and deductions are both ways to reduce your tax bill. Strategies used in previous years should be re-evaluated because of changes to personal exemptions and standard and itemized deductions under the TCJA:

Personal Exemption and Standard Deduction

The personal exemption amount of $4,050 has been eliminated. While taxpayers can no longer claim this amount for themselves and each of their dependents, the standard deduction amount has nearly doubled. For single filers, the standard deduction has increased to $12,000, and for joint filers, the amount has increased to $24,000.

Itemized Deductions

Before the TCJA increased the standard deduction, many taxpayers chose to itemize deductions because it resulted in greater cost savings. Whether or not you choose to itemize moving forward will depend on changes made to the thresholds and limitations for deductible expenses:

Medical and Dental Expenses: On your 2018 tax return, you can deduct medical expenses that exceed 7.5% of your adjusted gross income (AGI). The ability to deduct more of your expenses and potentially lower your taxable income will benefit individuals with high health care costs.

Pre-Paid Taxes: The total deduction of your state and local taxes, real estate taxes, and personal property taxes is now capped at $10,000. This could impact taxpayers who own a lot of real estate and are used to making sizeable deductions.

Mortgage Interest: For newly underwritten mortgages, there’s now a $750,000 cap on the amount of interest that’s deductible. For home equity lines of credit (HELOC), the TCJA includes changes to both new and existing loans. These loans need to have been used to buy, build, or improve the property the loan was secured under in order to be deductible.

HELOCs have often been utilized by individuals as an advantageous way to meet short-term liquidity needs. Now that the usage and therefore deductibility of a HELOC is limited, you may want to discuss loan alternatives with your financial advisor.

Gifts to Charity: For cash contributions, the charitable contribution limit has increased to 60% of your AGI.

However, cash gifts may not be the most advantageous way of making a charitable donation. If you are over the age of 70.5, you’re eligible to make a Qualified Charitable Distribution (QCD), which is a tax-free distribution made directly from your IRA to a qualified public charity.

Utilizing a QCD is advantageous to those who have significant income and are charitably inclined. You may be able to substantially reduce your AGI and subsequently lower your taxes. Be sure to discuss with your financial advisor how to best use this tax management strategy.

How this will affect you

Due to the larger standard deduction amount, many filers may choose this option for the first time. However, even though the standard deduction amounts are significantly greater than they were in previous years, not every taxpayer will benefit as it depends on your filing status, number of dependents and impacts to itemized deductions.

Alternative Minimum Tax (AMT)

With the TCJA, AMT exemption amounts have increased and are adjusted for inflation:

How this will affect you

Due to the increased threshold, this is a significant change that will positively affect many taxpayers who have been susceptible to AMT in previous years.

529 Plans

The new tax law expands the usability of 529 plans to include elementary, secondary, and private school tuition. Families can also now roll over 529 plan funds to ABLE accounts, which are tax-advantaged savings accounts for disabled individuals. These changes began in 2018 and are now permanent; they will not sunset in 2025.

How this will affect you

Families are now able to use 529 plans as an education savings vehicle for more than just higher education expenses; which may provide an opportunity to increase contributions based on your objectives. 529 plan contributions can provide valuable state tax deductions if structured properly. We recommend discussing your goals with your financial advisor to develop an education savings strategy to best meet your needs.

Estate Tax

The estate tax exemption amount has doubled to $11.2 million for single filers and $22.4 million for joint filers through 2025.

How this will affect you

Gifted assets during your lifetime may not be considered part of your taxable estate when transferred properly. If you have a sizable estate, discuss accelerating gifting with your financial advisor to shield more of your assets from the 40% estate tax.

The intent of the TCJA is to simplify tax reporting and lower tax bills for many. Whether this is a reality for you is dependent on the right tax strategy for your financial situation. What has worked for you in the past may not be the best strategy for you in the years to come. Consult with your tax professional and financial advisor to determine the best tax strategy for you and your family.

As always, if you have any questions about the tax law changes, or anything to do with your portfolio, please contact us.

[1]More information on tax law prior to 2018


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