Understanding the New Tax Law & Wealth Building
Learn how you can use the recent United States tax cuts and job act law changes to maximize your 2018 and future tax filings…
With the new tax bill out and anxiety in the air among many taxpayers the creator of TheWealthIncreaser.com had no choice but to review the new tax bill to help alleviate the fears of many and help those who desire greater success build wealth more efficiently in the coming years.
Even the creator of TheWealthIncreaser.com found navigating the bill of several hundred pages to be boring and cumbersome—however key aspects that could possibly benefit you and others were focused on and analyzed.
In the following paragraphs highlights of the bill will be analyzed and presented in a manner that could possibly help you build wealth in 2018 and beyond in a more efficient manner.
Even though the new tax law will reduce the taxes for millions, that does not mean that you will be included among the millions as personal taxes are unique and vary from person to person and family to family.
The good and bad news is that tax rates were lowered across the board but are scheduled to expire in 2025 unless congress decides to make them permanent.
To keep this discussion logical and concise the order of presentation will try to keep the format of the 1040 long format as the blueprint or guideline for discussion.
Personal Exemptions Are Now Gone
You can no longer claim your children or other dependents and get a personal exemption for them—or yourself and your spouse if married.
Those exemptions that you have become accustomed to getting have been replaced with higher standard deductions, lower tax rates, increased child tax credits, and a dependency credit for other dependents of $500.
Whether the new tax changes will be of more benefit to you depends on the age of your dependents, your income level, your family size, your above the line (page 1 of form 1040) and below the line deductions (page 2 of form 1040) , your tax withholdings and many other factors that may be unique to you and your family.
Standard Deductions Are Increased Substantially
Standard Deductions are now $12,000 for single up from $6,350, $18,000 for head of household up from $9,350 and $24,000 for married filing jointly up from $12,700.
Be aware that claiming the higher federal standard deduction may not be a wise move in some cases. It depends on a number of factors, including the amount of your itemized deductions and your state income tax filing standard deduction (if applicable)–among other factors.
Child Tax Credit Increases
The child tax credit increased from $1,000 to $2,000 so if you have a child under age 17 you would more than likely be eligible for the credit. The income limits for phaseouts also increased as you can now earn up to $400,000 (AGI–line 37 of form 1040) and still take the credit (up from $110,000 in 2017). In addition, $1,400 of the credit is refundable meaning even if you owe no taxes you are entitled to the refund.
To claim the credit your child dependent must live with you at least half a year and you must provide over half the cost of support for the child in order for you to claim the child tax credit—similar to when exemptions were claimed in past years.
The EIC or Earned Income Credit remains as well—meaning those with modest income and a family of 4 with kids under 17 could see a possible increase in the amount of the refund they will receive on their 2018 tax filing.
Those over age 17 whom you provide support such as college students, parents and others will provide you the opportunity to claim a $500 tax credit in the filing of your taxes if they meet the guidelines for dependents under the tax law.
The Marriage Penalty is Finally Eliminated or at Least Made Less Relevant for Most
Under the new law the tax bracket for married couples are almost double that of a single person in most instances. If you have been avoiding matrimony due to the tax code or financial concerns—you can now breathe easier.
If you make $500,000 or more (which is a good problem to have) the marriage penalty again starts to rear its ugly head—If you make over $500,000 and plan on getting married soon—consult your tax professional before making the hitch as there may be ways that you can reduce the tax bite.
Alimony is also affected by the new tax law as you can no longer deduct alimony if you pay alimony and you don’t have to include alimony as income if you receive alimony (must be after December 31, 2018 otherwise old rules apply).
Education Deductions Remain in Place
Although TheWealthIncreaser.com did not initially take the news of eliminating the student loan interest deduction seriously—due in large part to the number of student loans outstanding and the hardship that the payments continue to cause for many—there were serious efforts to eliminate this helpful above the line deduction.
Fortunately, those in congress used their better judgment and the deduction for up to $2,500 worth of interest on student loans remain!
Tuition waivers and discounts by graduate students also remain tax-free.
The AOTC or American Opportunity Tax Credit worth up to $2,500 per undergraduate student (MAGI of $80,000 single and $160,000 married) survived the new tax bill.
The Lifelong Learning Credit also survived the new tax bill and it is worth up to $2,000, or 20 percent of the first $10,000 spent in a year (MAGI of $56,000 single and $112,000 married).
The $2,000 limit is per household with the Lifelong Learning Credit but the American Opportunity Tax Credit applies per student and could be more valuable to you if you have several kids in college. Your overall credit would be higher, thus your tax bill would be lower or your tax refund would be higher!
529 college savings plans are now eligible to be used for k through 12 grades at private or parochial schools—in addition to colleges and universities.
Coverdell accounts remain although it appears they will be phased out and the cap remains at $2,000 annually, however you can now roll them over into a 529 plan tax free.
Always keep in mind the fact that many states also sweeten the pot—as you can deduct 529 contributions in many states. And with the limits on property taxes (discussed later) that could be significant for those affected by the limitations.
ABLE accounts now are available for setup for a disabled beneficiary and can be legally rolled over from a 529 plan. The benefit of doing so includes the tax-free use of funds for a variety of purposes—not just college, private or parochial school.
Assets up to $100,000 don’t count toward the $2,000 limit for SSI benefits. Contribution limits are capped at $15,000 in 2018 and your rollover from the 529 plan would count toward that cap if you were to roll over a 529 plan into an ABLE account.
Educator expenses continue to be deductible (up to $250) by teachers who come “out of pocket” to purchase classroom material and supplies.
Most Retirement Plans Are Not Affected by the New Law
With the new tax law a change in your withhholdings may occur. If you are in a strong financial position consider using the additional amount that you may see on your check to save more for retirement to help lower your taxable income and build wealth more efficiently.
IRA to a ROTH conversions also see limits. In the past you could undo the conversion and avoid the tax bite by re-characterizing the conversion by October 15 of the following year. Now once you convert, it is permanent as far as the tax bite is concerned.
However, if you feel that a conversion is more beneficial for you and your family and you have the funds to handle the tax bite that could still be an effective strategy. In addition, you could convert yearly a certain amount to lessen the tax sting.
Real Estate Takes a Hit with the New Law
Many residents of high cost cities where housing costs are high are crying foul over a number of provisions in the new tax. The new law limits how much mortgage interest you can deduct. The limit is now $750,000 (primary and vacation homes) down from 1 million.
Home Equity debt (home equity loan and home equity line of credit) interest is no longer deductible unless the money from the loan is used to improve your home.
Property tax deductions on your schedule A are capped! The new law limits the amount that you can deduct in state income and property taxes at $10,000.
Like Kind Exchanges under Section 1031 of the Internal Revenue Code are now limited. Like-kind exchanges of Real Property survived the new tax bill, however like-kind exchanges no longer apply to any other property–including personal property associated with real property.
Capital Gain Tax Rates are Preserved
Capital gain rates remain the same but the calculation formula now differs from using the tax brackets as in the past to using income thresholds.
If your income is less than $38,600 single or $77,200 joint you are at the 0% rate based on your income threshold.
If your income is between $38,600 to $425,800 single or $77,200 to $479,000 joint you are at the 15% rate based on your income threshold.
If you are in the ideal position of having even higher income your capital gains rate would be 20%.
The above capital gain tax rates apply to long-term capital gains (assets held over a year) and if you were to sell capital assets held less than one year you would pay tax at your ordinary income rate.
The “so called” kiddie tax that you would normally pay also has a change in the way that it is calculated.
Charitable Giving May Take a Hit Due to the Higher Standard Deduction Amounts
Charitable organizations were not pleased by the changes in the new tax law. Even though charitable deductions are still deductible on the 1040 long form the likelihood of many using the long form has decreased due to the elimination of personal exemptions and the increase in the standard deduction.
Although many give generously out of the goodness of their heart, they still enjoyed the knowledge and annual application of a tax break. That tax break that many have been accustomed to utilizing for years will be eliminated for some taxpayers due to the increased standard deduction which effectively wipes away their ability to itemize and claim their charitable giving.
Self-Employed & Those Who Have Pass Through Income Will See a Benefit
If you are self-employed or make additional income from a side job you could possibly benefit significantly from the new tax bill. Many self-employed businesses will be allowed to deduct 20% of “qualifying” income from their taxable income. Even so, there may be limitations depending on your business type and income thresholds.
Qualifying income is what the new law states that it is and can be a gray area, so consult your tax professional.
Entertainment expenses will no longer be deductible, however meals will continue to be deductible (50% limit).
Medical Deductions Ceiling Reduced From 10% to 7.5%
At least for 2017 and 2018 you can deduct medical expenses on schedule A and have a 7.5% floor as opposed to 10% under the old rules. The lower the floor the better–as it allows you to deduct more medical expenses on your schedule A.
The ceiling returns to 10% in 2019 so don’t get too excited. Hopefully congress will make the 7.5% floor permanent or at least extend the deadline as baby boomers will find a real benefit as they age and get out of the employment population and experience increased medical expenses.
2% Miscellaneous Deduction Including Unreimbursed Employee Expenses Take a Major Hit
Moving expenses have been eliminated unless you are an “active” member of the U.S. armed forces. Tax preparation, unreimbursed employee expenses (mileage, travel, home office expenses etc.), investment advisory fees and casualty losses other than those declared as a presidential disaster area have all been eliminated.
Look for shockwaves to run through certain industries where they have high “unreimbursed” expenses when they file their 2018 tax return as those who work in the affected industries will in some cases experience a substantial increase in their tax bill.
Corporations & Pass Through Entities Receive the Majority of Windfalls with New Tax Bill
With a major tax rate reduction to 21%–down from 35%–many corporations will receive a significant financial windfall due to the reduction in their tax rates as well as other perks offered in the new tax law.
Depreciation write offs and 179 deductions could possibly be of greater benefit to you if you purchase equipment that qualifies. However, there are no guarantee that they will continue indefinitely.
However, for the time being many corporations will benefit–and you too may be able to benefit as well if you are proactive and not reactive in looking at ways that you can better utilize the new provisions that are now available to corporations and pass-through entities.
Self-employed businesses, partnerships, S-corporations and C-corporations will all see a reduction in their tax rates and it is up to you to look at ways that you can use this new rate change to your and your family’s advantage by now getting in the game or playing the game more successfully by taking beneficial steps toward your goals at this time.
W-4 Table for Exemptions No Longer Apply
The withholding based on exemptions are a thing of the past and new tables for withholding are in the process of being created. It is important that you have your tax professional provide you projections based on your current withhholdings and the new rates and filing status to help plan for your 2018 tax filing in a more intelligent manner.
AMT & Estate Tax Remain
The Alternative Minimum Tax remains. However, the exemption has been increased to $500,000 for single taxpayers and $1 million for couples. This change is expected to result in fewer taxpayers being hit by the AMT tax.
The new tax law doubles the estate tax exemption to $11.2 million for single filers and $22.4 million for joint filers. This change will only affect a small percentage of the American population as effective estate planning and the increased exemption will leave a very small percentage of taxpayers paying this tax.
Affordable Care Act Individual Mandate Gone
In 2019 the tax (individual health mandate penalty tax) that was imposed for healthcare under the Affordable Care Act (often called, “Obamacare”) will be eliminated.
Conclusion
Be sure you understand the difference between a tax credit and a tax deduction as a credit is a dollar-for-dollar reduction and a deduction is based on your tax rate or a percentage of your taxable income.
Even though the new tax bill appears to overwhelmingly benefit corporations and those who are well established financially–you too can benefit! Be aware that much of the new tax bill was unfunded and will pass the cost on to others in an “irresponsible” way.
However, you can benefit now and in the future if you take the right steps to make the law work better for you and your family.
The new law provides the opportunity for those who are astute and who are willing to pause and take effective steps to use the new law to their advantage by asking and answering the right questions the ability to achieve at a higher level in the coming years.
How can “I” more effectively benefit from the various changes in the law during the various phases in my life?
How can I manage my finances at this time so that I can put myself in position to take advantage of the various changes in the law?
What can I do to avoid changes in the law that will negatively affect me?
These (and more) are the types of questions that you must ask yourself—and answer appropriately if you are one who desire to take advantage of the new changes in the tax law as opposed to having the new changes in the tax law take advantage of you!
It is the desire of TheWealthIncreaser.com that this discussion has at least got you started on a path to doing what you need to do to make the new tax law work better for you.
All the best as you pursue tax success…
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