The Tax Cuts and Jobs Act of 2017 has changed a number of income tax provisions. As a result, it may be wise to review your income tax planning strategy. Four specific changes to the tax code that may trigger an update to your plan include:
- Itemized deductions. The new law resulted in several changes to common itemized deductions. These changes specifically impacted the state and local tax deduction, home mortgage interest deduction, charitable deductions, and miscellaneous deductions for tax preparation and unreimbursed employee business expenses, among others. For example, the change to the deduction available for home mortgage interest payments has resulted to a new limit of $750,000 and is only allowed for home equity loans used specifically for home improvements. Another example is W-2 employees, such as sale people, won't be able to deduct their out-of-pocket business expenses such as automobile, telephone and supplies, which are not reimbursed by their employers.
- Standard deduction and personal exemption. The new law also changed the standard deduction - raised from $6,500 for single filers to $12,000. Married filing jointly has also essentially doubled from $13,000 in 2017 to $24,000 in 2018. The new law eliminated the 2017 personal exemption deduction of $4,050 for an individual.
- 529 plans. This tax planning tool is used to help fund future secondary education expenses. Recent changes have expanded the reach of these accounts, allowing the funds in a 529 plan to help fund elementary school costs as well.
- Tax rate. The federal income tax brackets have also changed. The law set the top income tax bracket at 37 percent, down from 39.6 percent. Married couples filing jointly with taxable income in excess of $191,650 but not more than $315,000 will see a reduction in their top rate from 33 percent to 24 percent. Under the new law, single filers with taxable income of more than $82,500 but not more than $157,000 in 2018 have a top rate of 24 percent versus 28 percent.
It is important to note that many of these changes are only effective until 2025. Unless Congress takes further action, these changes will sunset.
This is yet another example of the need to have an evolving tax planning strategy. An attorney experienced in these matters can keep you apprised of any potential changes that could trigger the need to revise your plan.