Are you ready for tax time? While it isn’t really an
exciting time, it’s something we all have to deal with, and this year there will be big changes. You probably remember all the big tax law changes that were announced in 2017, but now those changes are going to be seen in action with your 2018 tax return. Now that these tax reforms are impacting you in an immediate way, let’s take a look at some of the biggest changes that you need to be ready for as you file in the coming weeks.
Higher Standard Deductions
The most significant change is a new, higher standard deduction consisting of $12,000 for single filers, $18,000 for heads of household and $24,000 for people married filing jointly. Taxpayers have always had a choice between taking the standard deduction and itemizing — taking individual write-offs for things like mortgage interest and charitable contributions — but because the standard deduction has gone up, itemizing will make sense for fewer people. According to some estimates, nearly 90 percent of taxpayers will now take the standard deduction, up from about 70 percent in previous years.
New Tax Brackets
Another impactful change is the new tax brackets. The new tax brackets are broken out as follows:
Single Filing:
| Tax Rate |
2018 Income Range |
| 10% |
$0 – $9,525 |
| 12% |
$9,525.01 – $38,700 |
| 22% |
$38,700.01- $82,500 |
| 24% |
$82,500.01 – $157,500 |
| 32% |
$157,500.01 – $200,000 |
| 35% |
$200,000.01 – $500,000 |
| 37% |
$500,000.01+ |
Married Couple Filing Jointly:
| Tax Rate |
2018 Income Range |
| 10% |
$0.00 – $19,050 |
| 12% |
$19,050.01 – $77,400 |
| 22% |
$77,400.01 – $165,000 |
| 24% |
$165,000.01 – $315,000 |
| 32% |
$315,000.01 – $400,000 |
| 35% |
$400,000.01 – $600,000 |
| 37% |
$600,000.01+ |
Head of Household Filing:
| Tax Rate |
2018 Income Range |
| 10% |
$0 – $13,600 |
| 12% |
$13,600.01 – $51,800 |
| 22% |
$51,800.01 – $82,500 |
| 24% |
$82,500.01 – $157,500 |
| 32% |
$157,500.01 – $200,000 |
| 35% |
$200,000.01 – $500,000 |
| 37% |
$500,000.01+ |
Source: IRS
Remember that the tax rates above only apply to the income in the corresponding brackets. If you earn more money and find yourself in a higher tax bracket, you will not pay the higher tax rate on all of your income — only on the income in that bracket. The highest tax rate you pay is called your “marginal tax rate,” because it applies to each additional dollar in income.
Changes in limits for State and Local Income Tax (SALT) deductions
This year State and Local income Tax deductions are limited to just $10,000. While this change won’t be a burden to all homeowners, it will hit folks hardest in states with the highest property taxes, which include New Jersey, Connecticut, Wisconsin, Illinois and California.
Dependent exemptions are no longer available, but child tax credits have gone up
The $4,050 dependent exemptions that millions of parents had grown accustomed to taking for their children are no longer allowed, but the child tax credit was raised from $1,000 to $2,000, for children under 17, and families earning up to $400,000 can take advantage of the credit. The law also introduced a $500 credit for non-child dependents, which could include elderly parents or children over the age of 17.
Medical expense deductions have changed
In years past, your medical expenses had to exceed 10 percent of your annual income before you could deduct them, but now if they exceed 7.5 percent you can enjoy that deduction — if you itemize.
Expansion in allowable usage for 529 accounts
Prior to 2018, funds from 529 educational savings plans could only be used for college, but under the new law, families can use them for tuition expenses for grades K-12 as well as for university studies. This can be really beneficial for parents paying for private school or religious schools.
Now that we’ve had a full year with the new tax laws in force, we can better understand where adjustments in the tax planning portion of your financial plan are needed. These changes in the tax laws can not only have a significant impact on your 2018 tax return, but also your overall financial plan. You may need to ask yourself some challenging questions like: Do you need to reevaluate your withholdings? Should you reconsider how much and when you make charitable donations? How does this impact your estate plan? At Strategic Retirement Plans we believe that having a complete retirement plan means fitting all areas of your financial plan together so they complement one another. When one area changes (i.e. tax planning), all the other areas need attention as well.
Give us a call today and let us help develop a complete plan for you!
Strategic Retirement Plans does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Advisory Services offered through Commonwealth Financial Network®, a Registered Investment Adviser.
