The House and Senate have finally agreed on a version of tax reform. If all goes as planned, the President will have it on his desk before Christmas. It looks like the folks in Washington are going to have a holly, jolly Christmas, but what about the rest of us? Here is a first look at how your taxes will change starting January 1, 2018.
The new tax law contains seven tax brackets, just like the current tax code. The tax rate for each bracket is generally lower, including a top tax rate of 37 percent compared to today’s 39.6 percent.
For a given level of adjusted gross income (AGI), most people will see a reduction in their marginal tax rate. However, because the new law reduces or eliminates several key deductions, many people will report higher AGI. Higher reported AGI will offset some of the benefit tax reform would otherwise provide.
The reduced ability to itemize deductions is paired with a larger standard deduction. The new standard deduction for individual taxpayers is $12,000 and the new standard deduction for married taxpayers filing jointly is $24,000, nearly double what it is under current tax rules. Consequently, most people won’t find it attractive to itemize their deductions.
The following is a summary of changes to some key itemized deductions.
State, Local and Property Taxes. For those of us in California and other high tax states, one of the key changes in the tax code is the reduced deductibility of state and local taxes, including property taxes. The new law limits the deduction for these taxes to $10,000. Currently, you can deduct these taxes without limit from your federal tax return, unless you are subject to the Alternative Minimum Tax.
The AMT is staying, by the way, but with increased exemptions. The AMT exemption increases to $70,300 and $109,400 for individuals and married joint filers, respectively.
Mortgage Interest. Another key change for high property value areas like the Central Coast is the reduced deduction for home mortgage interest. Under the new law, the deduction will be limited to interest on no more than $750,000 of mortgage debt used to purchase a home. Current tax rules allow you to deduct interest on up to $1 million of mortgage debt. Interest on home equity loans will no longer be deductible. (Note that if your mortgage was in place before December 15, 2017, it is grandfathered under the $1 million limit.)
Charitable Contributions. The deduction for charitable contributions remains intact. If you make charitable contributions in cash, you will be able to deduct up to 60 percent of your adjusted gross income. That’s an increase from the current 50 percent. However, if you make contributions in appreciated property such as common stock or mutual fund shares, your contributions will remain limited to 30 percent of your adjusted gross income. If you give more than these limits, you can carry over your unused charitable deductions for up to five years.
Personal Exemption. The new tax rules repeal the deduction for personal exemptions.
Although there isn’t much time before year-end, it makes sense to look at the tax bracket you expect to fall into in 2018. Your CPA can help you with this. Based on that knowledge you can decide if it makes sense for you to defer some income or accelerate some deductions.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to email@example.com.