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Tax Reform [5 of 5] Individual Tax Return Changes

By January 29, 2018Taxes

There is a lot here, so let’s just dig in.

Individual Tax Rates

I am not going to post the exact tax rate changes.

Just know that the brackets were reduced by 2% for most brackets.

The only people who really won’t see a change are those that had income below $14,000.  And the reason they don’t see a change is because they aren’t really paying much tax anyway.  Everyone else will see a reduction of tax from this change.

Standard Deduction

Before, this was a $12,700 (or $6,350 if single) reduction of your taxable income.  Everyone got this as a tax benefit.

After, this is now $24,000 ( or $12,000 if single). So they basically doubled it for everyone.

For many this means that you may not need to itemized your taxes anymore, which would make filing those returns simpler if you are doing it yourself.  For our clients that are using the “Paying your kids” strategy.  This means you can now pay each of your kids up to $12k instead of the $6k that you paid in the past. As always, you need to be able to justify the amount you pay them.

Personal Exemptions

Before, you received $4,050 per dependent as another straight tax write off.

After, no more personal exemptions.

This really only hurts people that have more than 3 kids.  I happen to have 4 children, so I wasn’t excited about this change.

Itemized Deductions

On your tax return, you can either claim a standard deduction or you claim itemized deductions.  Just like the standard deduction has changed, they made some big changes to the itemized deductions also.

-Miscellaneous Itemized Deductions

Before, you could deduct things like unreimbursed employee expenses, tax preparation fees, teachers up to $250, and some others.

After, eliminated.  This is no more.

-Mortgage Interest Deduction

Before, you could claim as an itemized tax deduction, interest on your main home up to a loan amount of $1 million and up to $100,000 on a HELOC.

After, you can claim interest on loans up to $750,000 and the interest on HELOCS is not allowed anymore.

For most of our clients this isn’t a big deal.  It’s business as usual. Most of our clients who are affected by this, were already affected by this because their mortgages were more than $1 million to begin with.

-State and Local Taxes

This is probably the one that has received the most attention from the media.  So you may have already heard about it.

Before, you could deduct on your federal tax return income taxes paid to the state and your property tax with no limitation.

After, you can still deduct those, but the total tax benefit is limited to $10k.

One of our favorite simple strategies was to prepay your state tax liability in December.

This reduces your IRS tax and it was something you were going to have to pay within the next 4 months anyway.  So you might as well get a tax deduction for it.  Doing that in the future isn’t going to be as appealing with this new change.  Apparently, there are some states that are so poorly run that by not getting those prepayments, they think they are going to go bankrupt or other bad things could happen.

People still have to pay their state taxes and this change doesn’t do anything to the state income tax rates.  The states and those complaining about this specific change seem to think the only reason people are paying state taxes is because they can get a tax deduction if they itemize their taxes.  Guess what?  1) Only 30% of taxpayers itemize and 2) paying state taxes is still an obligation whether I get an IRS tax deduction for it or not.  So yes these state governments will probably wait a few extra months to collect those taxes.  But it’s still the same amount of money they were planning on collecting.

-Charitable contributions 

There were a few changes, but nothing that would really affect you.  Keep your charitable contribution receipts and you will be fine.

-Medical Expenses

Before, Obama raised the ability to claim medical expenses from 7.5% of AGI up to 10% AGI.

After, this new reform changes the rule back to 7.5% of AGI.

In the past, not very many people have spent enough money on medical expenses to get a deduction. But now that the “affordable care” act has run its course, and insurance companies have really stuck it to the American people, everyone can now see how “unaffordable” health care has become.

In a 3 year span, with no additional kids, or any sort of health issues, my health insurance went from $5,000 a year to $12,000 a year.  Oh…and my $12,000 a year plan has a much higher deductible and worse benefits.  Basically, I pay $12,000 a year for the right to pay for all my medical expenses out of pocket.  Since the new tax law has a smaller threshold to overcome, taxpayers may see some benefit from this change.

Alimony Payments

Before, these were allowed as a deduction to the person paying the alimony and it was claimed as income by the person receiving alimony.

After, It’s no longer a deduction for the person paying and it is no longer taxable income for the person receiving.

Moving Expenses

Before, if you had to move because of employment, you were allowed to deduct your cost of the move.

After, this deduction now only applies to members of the Armed Forces.

What this means is that if your employer provides any type of support for helping you move, that amount will be taxed to you on your w-2.

Child Tax Credit

Before, you could get a $1,000 tax credit for each child under the age of 17.  After $110k of AGI ($75K if single), this credit started to phase out.

After, the tax credit is now $2,000 and the phase out happens at $400k ($200k if single).

Qualified Education Expenses

Before, being able to claim qualified education expenses was limited to “higher education” which is anything past high school.

After, qualified education expenses now include elementary and secondary school expenses.  They are going to limit you to $10k per year on this though.

This is a nice benefit to those that are paying for any type of private school for their kids.

And it looks like there are a few changes we couldn’t group into a category, so we will be sending you a bonus post going over some random changes that may affect you.

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