Big Tax Changes You Need to Know About - The Broke Professional

Big Tax Changes You Need to Know About

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (TCJA) into law.  This was one of his pet projects and something he has promising since his campaign.  He also promised that this law would give middle class families a huge tax break.  That remains to be seen.

The TCJA went into effect on January 1, 2018 and it comes with many big changes.  For some people, the effect will be large and there will be lots of planning that needs to get done.  For others, there might be a small change here and there but nothing that would require any real behavior change.

The TCJA provides the first sweeping tax change since the Reagan era.  So it’s important to know how it will effect you.  In this post, I’m going to go over some of the biggest changes in the tax law and what changes you need to make, if any.

If you want to read the bill in its entirety, be my guest.  Otherwise, here are the biggest changes you need to know about.

Much Bigger Standard Deduction

When you file your taxes at the beginning of the year, you have the option of taking the standard deduction or itemizing your deductions.  I’ve written about this before here, but the most common itemized deductions are mortgage interest, property taxes and charitable contributions.  If you have a high amount of these types of payments during the year, chances are you will save more on taxes by itemizing.

This will change for a lot of people this year.  For 2017, the standard deduction amount for single filers was $6,500 ($13,000 married).  The new standard deduction for 2018 will be $12,000 ($24,000 married).  Meaning there will be many more people choosing to take the standard deduction.  This simplifies the tax code in general, but it comes at the expense of other favorable tax treatment as I will explain below.

Behavior change: Most homeowners choose to itemize based on their mortgage interest deduction.  If you won’t be able to do that for 2018 because of the new standard deduction amounts, then the popular mortgage interest deduction doesn’t really provide any benefit.  Depending on your financial plan, it might be time to consider paying your mortgage off early.

State Income and Property Tax Limits Imposed

In 2017, you could itemize your deductions by writing off your state income tax and property tax.  This was an unlimited deduction for the most part.  Helpful for everyone, but especially for those with high state and property taxes.  But change is afoot.

For 2018, you can only deduct a maximum of $10,000 combined state income and property tax.  This is a huge change and will hit those who live in big coastal cities the hardest.  Homeowners in high tax states can easily pay $20K in state income tax and property tax combined.  This rule puts them in a real bind.

Behavior change:  Move or start renting.  For those who live in states like California or New York and have been contemplating a move to a cheaper part of the country, this will give you a little more motivation.

Elimination of Personal Exemptions

This is a key change that will hurt many working professionals with kids.  In 2017, for every member of your family (including yourself), you could take a tax deduction just for being alive.  The value was $4,050 for each family member.

So a family of 4 could take a deduction of $16,200.  This deduction is completely eliminated for 2018.  This is one reason the standard deduction for 2018 will be higher.  It will make the tax code simpler, but will hit couples with children the hardest.  It is slightly offset by the next change I will discuss.

Behavior change:  Not really much you can do here.

New and Improved Child Tax Credit

Tax credits are much better than deductions.  They provide a dollar for dollar reduction in the tax you owe, while a deduction simply adjusts your income a little lower.  The Child Tax Credit has been a nice one that has been around for about 20 years.  It provided families a $1,000 credit for each eligible child.

The problem was, the income phaseout limits were pretty restrictive for many professionals.  For married couples, once their income hit $110,000 the credit was reduced.  For high income professionals, the Child Tax Credit was a pipe dream.

But it is getting a big face lift for 2018.  The Child Tax Credit will now be worth $2,000 per eligible child.  Also, the income limit increases from $110,000 for married couples to $400,000.  

This will make the Child Tax Credit a reality for many couples.  It will also lessen the sting of the personal exemption elimination.  This change is a nice win for all.

Behavior change:  Have more kids!

Tax Bracket Adjustments

The tax bracket changes are another big one.  Essentially all the tax brackets (except the 10%) will be reduced.  And the 35% bracket is widened considerably, which will help high income couples.  Here is the old 2017 bracket:

Here is the new 2018 bracket:

So most people will see a slight decrease in their taxable income.  Not too bad.  This will be the way most people will see some tax savings.

Behavior change:  Employers should be adjusting paychecks to reflect the new tax changes by February.  Just take any extra money you find and add it to your savings and investment plan.  There is no use to have savings if you don’t use the money right?

Student Loan Interest Deduction

Just kidding!  No changes here thankfully.  The deduction maximum of $2,500 remains the same.  Though it would be nice if it was a little higher since tuition rates, and thus student loan balances, are constantly increasing.

Conclusion

The big winners of this tax reform seem to be large corporations, who saw their maximum tax rate changed from 35% to 21%.  Whether this will translate into more cash for employees and a healthier economy, only time will tell.  Families who can take advantage of the Child Tax Credit will also win.

The big losers are high income single filers who own homes in a high cost of living area.  They get hit on so many levels, but especially the state and property tax limit.  Another thing to consider is that these changes are not permanent for the most part.  Many of the big changes will “sunset” in 2027, which will then revert back to the old tax laws.  Nothing in politics is permanent after all.

These changes will affect our returns we do in 2019, so we still have some time to see what the effect on the country as a whole will be.  But it’s important to know the big changes and how you will have to change the way you approach money.  Stay tuned!

(Micheal Kitces CFP provides a great and detailed overview of the tax changes here.  If you want to dig in a little more, this is a great resource.)

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Comments

  1. Great breakdown and explanation. But please don’t toy with recent college grads re: student loans 🙁
    I’m kind of looking forward to doing my taxes just a hair more this year. It’ll be interesting to see where I end up in terms of standard VS itemized deduction.

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