Daylight savings has ended, Thanksgiving is in a couple of weeks, Christmas ads have already started to air…what better time is it to talk about tax planning?!
Realistically, tax planning is something to think about throughout the year, but since the end of the year is in sight and we’re still getting used to the provisions of the tax law that went into effect at the beginning of 2018, if you haven’t yet thought about your 2018 tax picture, you should probably start now, since there are many things that could affect your 2018 tax return. Here are just a few things to think about.
Tax Brackets
The new tax law lowered many of the tax rates, with the maximum rate being 37%, compared to 39.6% under the old law. Oddly, in spite of the lowered tax rates, some people may actually see an increase in their tax, because of the break points from one rate bracket to the next, and how they’re different this year from where they were last year. For example, a single taxpayer with taxable income of $300K would have been in the 33% marginal tax bracket in 2017, but will be in the 35% bracket in 2018. If you’re curious about where your taxable income will fall, check out the 2017 and 2018 tax rate schedules.
Additional Medicare and Net Investment Income Tax
The new tax law doesn’t change the fact that taxpayers above certain income levels will be subject to the .9% Additional Medicare tax and the 3.8% Net Investment Income tax. Taxpayers who are nearing the threshold for being subject to these taxes might think about deferring income or not selling investments at a gain, to keep their income below the threshold.
Standard Deduction
The new tax law almost doubled the standard deductions for taxpayers, and are now $12K for single taxpayers and $24K for joint taxpayers. I’ve already seen instances where clients who were able to itemize deductions in 2017 look like they’ll wind up with a standard deduction for 2018, even some people who own a home and would ordinarily be able to itemize deductions because of the mortgage interest and real estate tax paid.
Personal Exemptions
Gone! I can’t really say more than that, other than for people with kids (especially 3, 4, 5, or more) they’re not going to see that $4K per kid deduction on their 2018 returns, which in the past added up to a decent deduction. It’s not just dependent exemptions that have disappeared; the exemptions for the taxpayer and spouse (if applicable) are also gone.
Child Tax Credit
In lieu of the loss of personal exemptions for dependents, the new tax law increased the amount of the child tax credit to $2K, and increased the income thresholds at which the credit phased out, so more taxpayers with higher incomes with kids will be able to claim a child tax credit.
State and Local Taxes
This is an item that got a lot of publicity at the end of 2017, as people rushed to pre-pay real estate tax before the new tax law kicked in. Starting in 2018, $10K is the maximum that any taxpayer (single or joint) can claim for all of these taxes; state & local income tax, real estate tax, personal property tax. Period. For taxpayers with multiple homes (principal residence and vacation home, etc) the limit is still $10K. Perhaps it’s time to turn the vacation chateau into a rental property, as that could help generate the deduction for real estate tax.
Mortgage Interest
For mortgages obtained after 12/14/17, interest is deductible only on a maximum of $750K of loan value. Additionally, interest on home equity loans/lines are no longer deductible, unless the proceeds were used to buy or substantially improve real property. In other words, if a home equity loan/line was tapped to pay off credit card debt, student loan debt, fund a vacation, etc, the interest is no longer deductible.
Miscellaneous Itemized Deductions
Similar to personal deductions…gone! Examples of miscellaneous itemized deductions are unreimbursed employee expenses, tax preparation fees, safe deposit box fees, and investment fees. These had been subject to a 2% adjusted gross income (AGI) threshold, and in the past I saw a lot of clients whose AGI was too high, and they didn’t get this deduction anyway, but for those who had gotten the deduction in the past, they’re going to miss it now.
These are just a few of the many changes that could affect taxpayers’ 2018 tax returns. I would highly recommend giving some thought about doing an income/tax/withholding projection, so you’re not surprised by a big balance due this coming tax season. Your favorite CPA (named Jay) in Arlington can help you with that!
Jay E. Reiner, CPA 