Information updated 12-26-2017.
Keep in mind:
The tax reform bill does not take effect until 2018. Our 2017 taxes that we file in the beginning of next year will not be affected by this bill. With one exception explained below, most all of the information in this email pertains to your 2018 tax return that we will file in 2019. The Tax Cuts and Jobs Act tax reform bill passed the House and Senate and was signed into law by the President on Friday, December 22, 2017. This is the first major overhaul of the tax code in over 30 years. Many of the individual provisions are set to expire by the end of 2025 (unless congress later extends or makes them permanent), but most of the corporate provisions are permanent (until the law gets changed).
**PLEASE KNOW…MAJOR DISCLAIMER…
For my tax clients… I am working hard on creating a spreadsheet that will clearly show you how your 2018 taxes will be different from your 2017 taxes that we will file at the beginning of next year. As you can imagine, it’s going to take me some time to get this spreadsheet up and running, but by the time we meet for taxes, I will be able to clearly show you how the law will personally affect you and how to make any necessary changes. This spreadsheet will be done by the time we meet, and I hope you understand that for now, I cannot easily calculate exactly how this law will affect you. I will be able to do so very soon however.
PLEASE READ…. A few other disclaimers:
This email is long…by far the longest email I’ve ever written. Since this is the first major tax reform in over 30 years, I guess it warrants a long email. The new tax bill is 1,097 pages long, and obviously this email doesn’t contain everything that’s in the new “Tax Cuts and Jobs Act” tax reform bill. I have tried my best to summarize and highlight the most relevant parts of the bill that will affect most of us. Also, as I hope you know, I always do my best to make sure the information I provide is accurate and correct. That being said, although I hope there are no mistakes in this email (including grammatical), please forgive me if you do find an error. If you do see something incorrect, let me know, and I’ll do my best to clarify and correct the mistake. Finally, I am anticipating that I will be receiving a ton of emails and phone calls in the coming weeks. I will do my best to reply in a timely manner, but please forgive me if I take a bit longer than usual to respond.
Before reading any further… please go get a copy of your 2016 tax return.
A lot of the information I provide below will make much more sense to you if you have a copy of your return with you. I’m hoping I’ve provided enough information for you to see how the new law affects you personally, but I’m sure you’ll still have some questions, so please feel free to contact me if you do. As I wrote earlier, I’m currently working on spreadsheet that will show you how the tax law will personally affect you. Until this spreadsheet is completed, I will not be able to easily show you how the changes will affect you.
3 THINGS YOU CAN DO NOW BEFORE THE END OF THE YEAR.
This information only applies if you itemize. Here’s how to know if you itemize your deductions:
On your 2016 tax return:
- If you filed Form 1040-A or 1040-EZ last year, you took the standard deduction and DID NOT itemize.
- If you filed “Single” on Form 1040 – look at line 40 on your 1040, if the amount is over $6,300, you itemized.
- If you filed “Married” on Form 1040 – look at line 40 on your 1040, if the amount is over $12,600, you itemized.
- If you filed “Head of Household” on Form 1040 – look at line 40 on your 1040, if the amount is over $9,300, you itemized.
Pay Property Taxes Early
If you itemize, and you can afford to, you may want to pre-pay your property taxes that are due in March before the end of this year. In 2018, there will be a cap of $10,000 on the amount you can deduct from your State and Local Taxes, including your Property Taxes. For many of us in California, we are above the $10,000 amount… see line 9 on your Schedule A for your total amount. If you have an escrow account and pay your taxes with your mortgage, be sure to call the bank who holds your loan and see how you can go about paying your taxes early.
Give to Charity
Since the standard deduction is almost doubling in 2018, many people who currently itemize and deduct their charitable giving, may not be able to do so next year. If you itemized in 2016, and your amount on line 40 of your 1040 is below the new Standard Deduction amounts (see the section below), you may want to consider giving more this year since you may not be able to deduct your giving next year.
Pay more on your Equity Loan on your home
In 2018, we will no longer be able to deduct our equity line of credits from our income. If you can afford to pay a bit more now, you can get a little more write-off this year for the little bit of extra interest you’ll pay.
2018. Everything below affects your 2018 taxes that we file in 2019.
I’ve labeled everything below as either good news or bad news. This is my opinion based on how I see the changes affecting most people’s personal taxes. These opinions are all based on how the changes will affect our pockets… and not based on anything political.
Good News: Educator Expense Deduction, Student Loan Interest Deduction, and Medical Expenses Deductions are staying put.
Although earlier proposals discussed eliminating these deductions, they have remained intact. The final bill keeps all of these deductions and actually expands the medical expense deduction for 2018 and 2019.
Good/Bad News: Coming Soon…Changes to your paychecks.
Beginning in February, exemption/withholding calculations on your paychecks will be changing based on what you are claiming on your paycheck. For many people, this change will cause your withholding to lower the amount withheld for federal taxes (which will increase your take home pay). Because these withholding calculations are based on a certain formula, and are not based on your individual taxes/situation, this change may or may not be good for you. Once these changes go into effect, it would be very smart to review your specific situation and see if you need to make any adjustments to your paycheck based on this change. As most of my tax clients know, I always encourage everyone to review their paychecks to make sure there are no hidden surprises when filing taxes for the following year.
Good News: Tax Rates are decreasing.
For the most part, our tax rates are decreasing. The current tax rates are: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. These rates will now be 10%, 12%, 22%, 24%, 32%, 35% and 37%. Although it may sound odd, keep in mind, this doesn’t necessarily mean you’ll be paying less in total taxes. Because we are losing some deductions/credits, and because some items are being capped, your taxes could be higher. You have to review every aspect or your personal situation to get a clear idea of how your total taxes will be personally affected.
Good News… for some. Standard Deduction Nearly Doubles.
To know how this will affect your 2018 tax return that we will file in 2019 see below:
- If you filed “Single” in 2016:
- Your 2018 tax return will be the greater amount of either $12,000 or an amount similar to what you have currently listed on Line 40 of your 1040.If you filed a 1040A, the amount on line 24 will be $12,000 on your 2018 tax return.
- If you filed “Married” in 2016:
- Your 2018 tax return will be the greater amount of either $24,000 or an amount similar to what you have currently listed on Line 40 of your 1040.If you filed a 1040A, the amount on line 24 will be $24,000 on your 2018 tax return.
- If you filed “Head of Household” in 2016:
- Your 2018 tax return will be the greater amount of either $18,000 or an amount similar to what you have currently listed on Line 40 of your 1040.If you filed a 1040A, the amount on line 24 will be $18,000 on your 2018 tax return.
Very Bad News: Personal Exemptions have been eliminated:
Within certain income limits, today you’re allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. This amount lowers your taxable income. The tax bill eliminates this major deduction. To see how this affects you, look at your 2016 tax return, the amounts listed on the below returns will no longer be deducted from your income:
1040- line 42…this amount will now be $0.
1040A- line 26.. this amount will now be $0.
Bad News: Caps on state and local tax deduction.
If you itemize your deductions, one of the benefits you receive is the ability to deduct state and local taxes along with property taxes. Today the deduction is unlimited for your state and local property taxes plus income or sales taxes. Although you can still deduct these taxes, there is now a cap of $10,000. If you look at line 9 of your Schedule A, this amount will be capped at $10,000. If you are currently under $10,000, this cap does not affect you. If you are over $10,000, then this obviously does affect you.
Great News: Child tax credit expanded
The credit has been doubled to $2,000 for children under 17 (currently $1,000). It is also now available to more people because the bill raises the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.
Good News: Temporary credit for non-child dependents.
The bill allows parents to take a $500 credit for each non-child dependent for whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
Bad News: Cap on mortgage interest deduction is lowered.
If you take out a new mortgage on a first or second home you will now only be allowed to deduct the interest on debt up to $750,000, down from $1 million today. Homeowners who already have a mortgage would be unaffected by the change.
Bad News: Interest on Home Equity Loans will no longer be deductible.
The bill no longer allows a deduction for the interest on home equity loans. Currently that’s allowed on loans up to $100,000.
Good News: Electric car tax credit remains.
Drivers of plug-in electric vehicles can still claim a credit of up to $7,500. Just like before, the full amount is good only on the first 200,000 electric cars sold by each automaker. GM, Nissan and Tesla are expected to reach that number some time next year.
Good News: Capital Gains Tax when selling primary home remains the same.
Homeowners who sell their house for a gain will still be able to exclude up to $500,000 (or $250,000 for single filers) from capital gains, so long as they’re selling their primary home and have lived there for two of the past five years.
Good News: 529 savings accounts can be used in new ways.
In the past, funds invested in 529 savings accounts wasn’t taxed, but it could only be used for qualified college tuition/expenses. In the new law however, up to $10,000 can be distributed annually to cover the cost of sending a child to a “public, private or religious elementary or secondary school.”