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Financial Tip

Financial Tip
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

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What You Need to Know about the New Tax Bill

It was supposed to be a tax bill that would substantially simplify tax returns and provide tax relief across the board, benefiting in some way all taxpayers. While it didn’t quite get there as far as tax simplification, the Tax Cut and Jobs Act that was just passed by Congress does cut taxes for the vast majority of Americans. Just how much any particular tax payer benefits depends on a number of factors, including the amount of taxable earnings and itemized deductions, marital status, family status and the state of residency. For many Americans, the tax bill gives and takes through various provisions that, on a net-basis, results in a less taxes owed. Here are some of the key provisions and the way they help or hurt taxpayers.

Lower Tax Brackets

Original versions of the bill sought to simplify taxes by reducing the number of tax brackets from seven to three or four. That was lost along the way to producing the final tax bill which keeps the number at seven. So much for simplification. But many of the marginal tax rates have been adjusted downward. The top rate dropped from 39.6 percent to 37 percent and most income levels will be taxed at lower rates. The downside is that the tax brackets are now linked to an inflation index, which will push many taxpayers into higher brackets over time.

Double the Standard Deduction

Perhaps the bigger news is the doubling of the standard deduction from $12,000 to $24,000 for married couples ($6,000 to $12,000 for single filers). That is significant for taxpayers who don’t itemize or whose itemized deductions don’t exceed the lower threshold. These taxpayers are the most likely to realize a tax reduction.

For those who do itemize, especially in high tax states like California, New Jersey and New York with high state and local taxes and big mortgages, the tax reduction could be much less and some could end up owing more in taxes.

Lower Mortgage Interest Deduction Cap

Under current tax law, the mortgage deduction is capped at $1 million of mortgage indebtedness, so it really only impacts homeowners living in the more expensive parts of the country. The new tax bill lowers the cap to $750,000 so, although it will affect more homeowners, it won’t impact most. Homes purchased before December 15. 2017 will be grandfathered for the $1 million cap. The real bummer for homeowners is the elimination of the tax deduction for interest on home equity loans.

SALT Deduction Remains with a Cap

The provision that caused most of the controversy was the elimination of the tax deduction for state and local taxes. Taxpayers in high tax states rely on that deduction to ease the pain of the higher state taxes they pay. Originally, the provision was to be eliminated altogether, but the final bill keeps it with a cap of $10,000 of state and local property taxes. For the high earners in high tax states that is a small concession.

Personal Exemption Gone

Everyone loves the personal exemption – the amount each individual is able to use to reduce their taxable income. Families especially loved it because the exemption was available for each dependent. The new tax bill eliminates the personal exemption. With the doubling of the standard deduction and the larger child tax credit, most taxpayers will still come out on top.

Child Tax Credit Doubles and Access Expands

The child tax credit has been increased from $1,000 to $2,000. More families will qualify for the credit because the phase out has also been increased for married couples from $110,000 to $400,000. The first $1,400 is refundable for people who owe zero taxes.

Alternative Minimum Tax Still Here

One way the original tax bill was supposed to simplify taxes was by eliminating the awful alternative minimum tax. The final version keeps AMT but it increases the threshold from $86,200 to $109,400 so it will impact fewer taxpayers.

No More Marriage Penalty

Under the new law, married taxpayers will pay taxes at the same tax rate as individual filers. For example, if two individuals each earned $150,000 under the old law they would be in the 28 percent bracket. If they got married, their $300,000 combined income would boost them into the 33 percent bracket. Under the new law, the couple would be in the 24 percent bracket – same as an individual earning $150,000.

Larger Medical Deduction

For taxpayers who do itemize, more medical expenses will be deductible. The new tax bill lowers the adjusted gross income (AGI) floor for medical deductions to 7.5 percent from 10 percent and it will be retroactive to the 2017 tax year. For example, a married couple with $100,000 AGI can start deducting medical expenses above $7,500 instead of $10,000.

You Lose Some Deductions

The tax bill eliminates several deductions, including just about everything that was categorized as “miscellaneous deductions,” which included items such as unreimbursed employee expenses and tax preparation fees. You’ll still be able to deduct charitable contributions and student loan interest.

Larger Estate Tax Exemption

The bill’s authors originally wanted to eliminate the estate tax altogether, but all they could muster in the final bill was an increase in the amount that would be exempt from estate taxes. The new exemption is doubled to $22.4 million for married couples ($11.2 million for individuals).

The majority of Americans may very well be able to file their taxes on a postcard. But, for many others, there is more to absorb from the tax bill. Be sure to meet with a tax professional to ensure you understand how the new tax law will impact your tax situation. Oh, and by the way, everything you come to understand about this new tax bill will go away at the end of 2025 when it is due to expire. Chances are, Congress will vote to extend most of the provisions, but you never know.

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