Now that the Tax Cuts and Jobs Act has been signed into law, you may be thinking about how the new code will affect your financial situation. This legislation represents the most significant change that the tax code has seen in three decades.
With that in mind, we’d like to share a high-level overview of some of the more substantial changes.
- The top tax bracket was lowered to 37% from 39.6%. In general terms, marginal tax rates were lowered at all levels. The exception is income for couples who earn between $400,000 and $424,950 (and singles who earn between $200,000 and $424,950), where the marginal rate will increase from 33% to 35% in 2018.
- Personal Exemption/Standard Deduction: The $4,050 exemption allowed for each taxpayer and their dependents in 2017 was repealed for 2018. However, the standard deduction increased as shown in the chart below.
- Capital Gains: The changes to the ordinary brackets require a corresponding change to the 2018 brackets for the three different capital gain rates:
All of these changes to ordinary and capital gain tax brackets and rates expire after 2025.
- Itemized Deduction for State and Local Taxes: The itemized deduction for state and local taxes is capped at $10,000. This limit applies to the combined amount of income and property taxes paid during the year. However, any property or sales tax paid in connection with a business (sole proprietorship, rental property or farm) will remain fully deductible against income from that business. Property taxes paid on foreign real estate are no longer deductible.
Although time is limited, you may want to consider having a conversation with your accountant about whether it makes sense to prepay your property taxes. More people are considering prepayment given the changes to the property tax deduction. At the very least, if your real estate taxes are above $10,000 annually, consider prepaying any amounts over $10,000. Check with your local county assessor’s office for their rules about completing the transaction by year end.
- Mortgage Interest: For mortgages entered into after December 15, 2017, the deduction for the interest is now limited to the first $750,000 of debt. In addition, the interest paid on home equity loans – both new and existing – is no longer deductible. The deduction for interest paid for a second home will still be allowed, as long as the combined debt on the two homes doesn’t exceed the applicable limit.
- Miscellaneous Itemized Deductions: Expenses that fall under the “miscellaneous itemized deductions” category are no longer deductible. Management fees paid to Huber Financial fall under this category and will no longer be deductible starting in 2018.