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Tax season may be in the far corner of your mind but it always seems to sneak up more quickly than we’d like. With more than 1,000 pages, understanding the tax law modified in early 2018
may seem daunting but can really help prepare you for the changes you’ll certainly see in the spring. So, in the interest of simplifying the complex, we’re giving you our Top Ten list of what you need to know about the new tax law:
The new law went into effect January 1, 2018.
Ironically, many of the tax codes you needed to know in April of 2018 when you filed your 2017 taxes were changed three months before that. The changes weren’t retroactive so for most of us we won’t notice many of the changes in the tax code until we file in 2019.
The seven bracket system lives on, but many of the rates have been lowered
. While much talk about a universal tax rate happened in the last election cycle, the progressive tax that grows according to income level lives on. Below is a chart comparing the seven tax rates a year ago and today.
2018 Tax Rates
|2017 Tax Rates
Want to know how the new rates will affect your paycheck? Here’s an overview:
The child tax credit has doubled
- 10% on income up to $9,525 for individuals, and up to $19,050 for married couples filing jointly
- 12% on income over $9,525 to $38,700, and over $19,050 to $77,400 for couples
- 22% on income over $38,700 to $82,500, and over $77,400 to $165,000 for couples
- 24% on income over $82,500 to $157,500, and over $165,000 to $315,000 for couples
- 32% on income over $157,500 to $200,000, and over $315,000 to $400,000 for couples
- 35% on income over $200,000 to $500,000, and over $400,000 to $600,000 for couples
- 37% on income over $500,000, and over $600,000 for couples
from $1,000 to $2,000 for children 16 and under. An additional benefit to the child tax credit is that it’s refundable up to $1,400, so even if you don’t owe taxes you can benefit. To claim this credit, the child must be a son, daughter, stepchild, brother, sister, foster child, or a descendant of any of these individuals like a grandchild.
A new credit has been created for non-child dependents
so parents are now able to claim a $500 credit for caring for their 17 or 18 year old child, or a parent or adult child with a disability. This temporary credit cannot be used on yourself or your spouse.
The interest on home equity loans is no longer deductible unless
the funds are used to buy, build or substantially improve the home that secures the loan. The old law allowed interest deductions on equity loans up to $100,000 regardless of how that money was spent. Something to consider if you’re looking at tapping into your equity.
You’re no longer mandated to buy health insurance…starting in 2019.
While the rest of these changes went into effect January 1, 2018, those who don’t want to buy their own health insurance will need to wait until 2019 before they can do so for free. The current penalty for failing to purchase health insurance is $695 per adult or 2.5% of income (whichever is greater).There are some exceptions to this penalty, such as going less than three consecutive months without insurance, or not making enough money to file taxes. Make sure to take a closer look at this mandate for the coming year.
The standard deduction has almost doubled
from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for couples. The increased standard deduction means many Americans won’t need to itemize their tax returns for 2018, meaning less work for everyone involved and a potentially decreased tax burden for everyone who would have claimed a standard deduction under the old plan.
Corporate taxes have been slashed from 35% to 21%
to help free up money for corporations to invest in their business and hire new employees. If the tax cut goes as planned, it’s good news for employees who are already benefiting from a job market with under 4% unemployment and for investors who already saw the Dow Jones Industrial Average grow over 25% in 2017.
Student loans are still deductible and 529 plan funds can now be used on private school and tutoring for K-12 school expenses
. Student loan interest is deductible up to $2,500 and the maximum 529 exclusion has been increased to $15,000 per individual. For student loan interest to be deductible your adjusted gross income cannot exceed $80,000 and you must borrow from an approved lender and an eligible educational institution.
Donations are more deductible
for all of the charitable givers who want to give up to 60% of their income for charitable gifting (up from 50% in 2017). The bad news for college sports fans is that college football tickets are no longer allowed to be given in exchange for charitable gifts.
While many of us have already been enjoying more money in our paychecks and less withholdings already, much of the new tax laws consequences have yet to be realized. Just how much these changes affect your finances is up to you. Whether it’s refinancing your home equity loan into your first mortgage to gain more in deductions, or investing more in your child’s 529 plan - now is the time to create a strategy that works in the new financial world and prepare for next year’s filing. Have questions about building your tax strategy? Reach out to a tax professional for expert guidance.
Contents of this blog article are intended to provide you with a general understanding of the subject matter. However, it is not intended to provide legal, accounting, or other professional advice and should not be relied on as such. Information may have changed since the publication date.