At this time of year, you may just be relieved to have gotten your 2017 taxes finished in time for the mid-April deadline. However, because of the sweeping changes in the tax bill passed last December, it isn't too early to start thinking about your 2018 taxes.
Tax reform implications
Because several versions of the tax reform law were discussed before it finally passed, there remains a fair amount of confusion as to what it does and doesn't include.
Many Americans should see an incremental change in their income tax rates, but more relevant to financial decisions now are rule changes that affect tax planning and savings strategies. Some widely-discussed possibilities, such as eliminating student loan deductions, did not make it into the final bill, so those deductions remain available. Other tax breaks, such as deductions on mortgage interest and state and local taxes, remained but in reduced form.
How will Trump tax plan affect me?
In the Republican tax proposal details, there were expansions to other tax breaks, such as the standard deduction and the use of 529 plans. In many cases, you can't afford to wait for last minute tax tips next year to learn about these changes. To take advantage of them -- and to be prepared for things that might increase your tax bill -- it helps to be aware of tax changes for 2018 throughout the year.
With a focus on changes that affect individuals (as opposed to corporations), this article offers tips on what tax changes you most need to watch out for this year.
Tax tips for 2018
Tax reform implications vary depending on several individual circumstances, but in general the following are some of the major changes you should be aware of:
1. 529 education savings plans more versatile.Contributions to 529 plans are not tax-deductible, but investment earnings are exempt from taxation as long as the money is ultimately used for qualified education expenses. While in the past those expenses were limited to college and other post-secondary education, now 529 plans can be used for elementary and secondary education expenses of up to $10,000 a year. Being able to use 529 money earlier in a child's education should encourage earlier saving by parents, though keep in mind that 529 contributions are limited by gift tax rules.
2. Standard deductions rise, personal exemptions fall.These two measures directly impact the amount of your income that is taxable. The standard deduction has nearly doubled, to $12,000 for individuals and $24,000 to married couples filing jointly. However, the personal exemption of $4,050 which previously applied to taxpayers and their dependents, has been eliminated. The larger the family, the more negative the net impact of these changes. Also, if you have previously itemized deductions, you may find the standard deduction is now higher than the total of those deductions, making it not worth itemizing. In particular, this could impact decisions about charitable giving.
3. State and local tax deductions capped.Your federal return now allows you to deduct no more than $10,000 in total for things like state income taxes and local property taxes. Naturally, this has the greatest impact on residents of high-tax states, so if you are considering relocation, factor this into your planning.
4. Mortgage interest deduction limited. Many feared buzz: mortgage interest no longer deductible. This deduction survived, but only on the first $750,000 of your mortgage debt. That level of debt has become common in some of the country's more expensive real estate markets, so if you live in one of those markets, this could affect how you finance your home. However, the exemption of some capital gains from the sale of a primary residence ( up to $250,000 for individuals, $500,000 for joint filers) remains intact.
5. Dependent credit expanded. The credit amount for children under 17 has been doubled to $2,000, and the income eligibility ceiling for the full credit has been raised to $200,000 for individuals, and $400,000 for joint filers. Also, you can now claim a $500 credit for non-child dependents, which is a plus for the millions of Americans who support their elderly parents, among others.
6. Long-term capital gains tax rates based on taxable income. These rates will be either 0 percent, 15 percent or 20 percent, depending on your income level, not on the amount of gains you had. Individuals with taxable income over $425,800 and joint filers with taxable income over $479,000 will pay the top rate. Short term gains continue to be taxed at income tax rates. Using income to determine the capital gains rate means you should now consider both the amount of gains you've taken plus your overall income when deciding on year-end tax strategies of when to take gains and losses.
7. Tax preparation fees not deductible. With all the tax changes for 2018, you might be tempted to seek the advice of a tax planning professional. That is generally a sound idea, but for 2018 expect to pay a higher price for that advice. One deduction that did not survive tax reform was that for tax preparation fees.
Here are ways you can tackle the tax reform implications immediately: Start saving for college early, look carefully at whether or not itemizing continues to make sense, lobby for lower state and local taxes (or move), set your budget for that next house with interest deductibility in mind and determine your strategy for timing of long-term capital gains.