The ink has barely dried on the new Tax Cuts and Jobs Act (TCJA), and already people are asking about what’s changed and what actions they should consider going forward.
We’ve highlighted some of the changes that will impact individual taxpayers, as well as a few tips to consider as we start the new year. As always, individual circumstances can vary, and you should consult with your tax advisor to determine what is right for you.
Filing your taxes
- This may get easier for a lot of folks for the 2018 tax year, as the standard deduction has nearly doubled (single or married filing separately — $12,000, head of household — $18,000, married filing jointly — $24,000), and many may no longer need to itemize their taxes. For those who are used to itemizing, things get a little trickier. Individual taxpayers will now be able to deduct only up to $10,000 of a combination of state and local property taxes and either sales or income taxes.
Tips: If possible, it may make sense to manage deductions by lumping them together in years where itemizing exceeds the standard deduction. Keep in mind that many of the provisions in the TCJA that affect individual taxpayers will sunset after 2025.
Effects on family
- The good news is that the child tax credit will increase from $1,050 to up to $2,000 for children under 17 years of age,subject to higher income phaseout limits. There is a new $500 dependent tax credit for qualifying dependents age 17 and older. Paying for almost any kind of education expense using 529 plans got easier, as these funds can now be used to fund qualified education expenses for grades K-12 (up to $10,000 per student per year), as well as college.
- For those who divorce or have separation agreements completed after Dec. 31, 2018, or existing decrees that are later modified, alimony and separate maintenance payments will no longer be deductible by the payer spouse and will not be included in the income of the payee spouse.
Tips: For large families, when you start estimating your 2018 taxes, keep in mind that the expanded child tax credit may offset the loss of personal exemptions. Think through the higher education financing plan before using up 529 plan funds for K-12 expenses. Divorcing couples may want to revisit how the new changes will affect their finances.
Home purchase, home equity and losses
- Deductible mortgage interest for new home purchases (beginning in 2018) of first or second homes is capped at loans of $750,000. Existing loans as of Dec. 15, 2017 will not be affected. Loans under binding written contracts entered prior to Dec. 15, 2017 and that close prior to April 1, 2018 will also not be affected.
- The deduction for home equity indebtedness — borrowing secured by your residence that is not used to acquire, build or substantially improve that residence – is repealed under the new legislation. Home equity loan interest used to acquire, build or substantially improve your residence is considered “acquisition” indebtedness and may still be deductible.
- The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.
Tips: Those using home equity loans to pay off debts such credit cards or other loans will now have to reconsider their options. Given the new limitations on deducting casualty and theft losses, it may be a good time to double check your property and casualty insurance coverage for adequacy.
Small business or self-employed
- Owners of a pass-through entity – such as sole proprietorships, partnerships, LLCs and S-corporations – will generally be able to apply a 20% deduction for their qualified business income, subject to wage limits that would begin at $315,000 for married couples filing jointly (or half that amount for single taxpayers). There are many complicated provisions related to this deduction, so taxpayers should consult their tax counsel regarding their specific situation.
Tips: Small business owners should work with their tax and legal advisors to ensure they’re using the most appropriate form of “legal entity” going forward. Employees may look more closely at the potential benefits of becoming independent contractor service businesses.
Estate and lifetime gifting
- Beginning in 2018, the individual federal estate tax exemption amount increases to $11.2 million per individual, or up to $22.4 million for married couples. Several states do have a state estate tax, inheritance tax or both. Therefore, you should consult with your legal counsel regarding your specific situation. This provision sunsets after 2025. Heirs will continue to receive a step-up in basis for inherited assets.
Tip: If you think you may be subject to federal estate taxes under the current law, it may not be wise to assume you’re out of the woods with the new doubling of the exemption amount. Keep in mind the higher exemption sunsets after 2025, and there may still be state inheritance and estate taxes to contend with.
- Those who are charitably inclined will now be able to deduct up to 60% of their adjusted gross income for certain cash donations to public charities. The new tax law did not make changes to the qualified charitable distribution option for those over age 70½.
Tips: Consider coordinating charitable giving with other expenses in years when you may exceed the standard deduction. Some donors may consider making large donations into a donor-advised fund in one year, to take advantage of itemizing, and then let the fund make smaller distributions over subsequent years.
USAA is here to help by providing additional information and guidance on your specific financial needs and goals as we evaluate the impact of the tax bill in 2018 and beyond. We’re committed to helping you make smart financial decisions all along the way.
Visit USAA’s Tax Center for information and resources. You can also speak with an advisor by calling 800-531-8722.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for noncompliance are severe and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisors regarding your specific situation.
Robert Steen, CFP®, MBA is the USAA enterprise advice director for Retirement and Complex Financial Planning at USAA. Robert serves as the advice expert on retirement and complex planning topics such as maximizing retirement savings, establishing a retirement income plan, managing financial needs during retirement, estate/trust/inheritance tax planning, charitable gifting, and distribution of assets.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
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