New Year…New Tax Changes

Jan 23, 2018

New Year…New Tax Changes

New Year, new Washington is what 2018 is shaping up to look like. The 2017 year was an important one in Washington that promises to carry forward changes to each and every American tax payer in 2018 and beyond. One of the most notable changes of the year was the passage of a new tax law. The tax law’s most notable change included a reduction of income tax brackets. It is important to know smaller changes in the tax law that impact those filing their taxes single, married filing jointly, married filing single, and head of household. These categorize the primary filings of American tax payers:

  1. Tax brackets
    • There are 7 Federal tax brackets in the final tax bill. Income thresholds for each bracket have changed as well, causing many American families to switch tax brackets in 2018
      • The changes go into effect in February for 2018 payroll tax withholdings
    • Tax table 2017 vs 2018- for Married Filing Jointly
      • 2017:                                            2018:
      • 10%- $0 and up to  $18,650    -10% – up to $19,050
      • 15%- $18,651-$75,900              -12%- $19,051-$77,400
      • 25%- $75,901- $153,100           -22%- $77,401- $165,000
      • 28%- $153,101-$233,350          -24%- 165,001-$315,000
      • 33%- $233,351-$416700           -32%- $315,001- $400,000
      • 35%- $416,701- $470,700         -35%- $400,001- $600,000
      • 39.6%- $over 470,700                -37%- $over 600,000
  1. Standard deductions increase
    • The Standard deduction is now $12,000 per individual, or $24,000 per married couple. It previously was $6,350 per individual, and $12,700 per married couple
      • Higher standard deductions equate to much less itemizing
  1. Medical expenses
    • Previously had to be greater than 10% of Adjusted Gross Income to be deductible, now only has to be greater than 7.5% of AGI to be deductible on tax return. The changes to 7.5% is for 2017 and 2018 filings. The threshold returns to 10% in 2019.
  2. IRA RMD charitable donations
    • For those individuals who are over the age of 70 ½, you may be on the cusp of increasing your tax bracket in retirement. A required minimum distribution is fully taxable from an IRA or 401k. If you have a required minimum distribution from a 401k or Individual Retirement Account (IRA), then making a charitable deduction from an IRA can allow you to avoid taking on additional taxable income.
    • You can donate to a charity of your choice, meet the government requirement for a required minimum distribution, as well as make sure you do not have to pay tax on the withdrawal
  3. State and local capped at $10,000 vs no cap before
    • State and local taxes for income and property used to be fully deductible on a tax return. The new tax law caps deduction at $10,000. Higher income earners will see some of the lost deduction offset by a standard deduction, depending on your filing method, but may still lose deductibility of state and local taxes.
    • There can be a benefit of making charitable donations that are larger in size, but possibly not as frequent, since the standard deduction is much higher now. Utilizing a bi-annual donation can get more benefit for an individual whose goal is to itemize on their tax return.

 

  1. Individual mandate gone for healthcare coverage
    • The previous law penalized each individual who did not have health insurance. The new tax law withdrew this requirement. Some of the reasons being discussed are to cut down on Affordable Care Act subsidies that the government had to pay insurers to cover so many people. Those who do not wish to have coverage do not need to starting January 1, 2019.  For the 2018 filing year you must have minimal health coverage. . Other forms of coverage exist that include disability, life, or catastrophic insurance to cover an individual if something unfortunate were to happen to their family.
  2. Estate tax credit now $11.2 million per person, until 2026
    • Prior to 2018 the estate tax, whose maximum was 40%, applied to individuals with estates over $5.49 million, and couples of estates over $11.2 million. The new tax law makes estate tax threshold changes, though these plan to expire in 2026. From 2018-2025 the thresholds will be $11.2 million for individuals and $22.4 million for couples. If your estate is less than these numbers, whether filing as an individual, or as a couple, you may not have to pay Federal estate taxes. If your monetary value is greater than these values, then you have to pay estate taxes. In 2026 the estate tax level will revert back to $5.49 million for an individual, and $11.2 million for couples. Our team does comprehensive planning to manage your tax plan throughout your life.
  3. 529 CHANGES
    • Annual contributions to a 529 account are $14,000 maximum. These types of accounts were created to help families save for the enormous expense that is college. In Ohio, up to a $2,000 income deduction is available on your state taxes for contribution to these accounts (please check your local state laws). The money grows over time, and is withdrawn tax free if the funds are used for qualifying education expenses (college, trade school, related expenses)
    • With the new tax law these 529 accounts can also be used up to $10,000 per year on private high school tuition. The tax free usage of the funds still applies as long as the funds are used for tuition related expenses.

 

HFS Wealth Advisors are by no means tax professionals. Full service planning allows us to use the above facts to develop a plan that includes the Lifestyle that you want to Live, and the Legacy that you want to leave behind to your Loved ones. We work in tandem to build your financial picture, alongside you and your accountant, to have the best plan of attack moving forward.

Written by Justin Hamlin – information derived from www.IRS.gov

These are the opinions of Justin Hamlin and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. The strategies discussed herein are not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. However, prior to opening an account Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model. You are also provided the opportunity to place reasonable restrictions on the securities held in your account.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses, summary prospectuses and 529 Product Program Description, which can be obtained from a financial professional and should be read carefully before investing. Depending on your state of residence, there may be an in-state plan that offers tax and other benefits which may include financial aid, scholarship funds, and protection from creditors.  Before investing in any state’s 529 plan, investors should consult a tax advisor. If withdrawals from 529 plans are used for purposes other than higher education, the earnings will be subject to a 10% federal tax penalty in addition to federal and, if applicable, state income tax.