You might have heard the news: Congress finally reached an agreement, and our income tax system will be changing in some fairly significant ways. But deciphering a 1,000-page law can be a tedious process, and even the experts have yet to comb through the bill’s intricacies. So, most of us aren’t completely sure how the new tax laws will affect us. Here is what we do know, at the moment…
Your basic tax rate might have fallen. The new bill preserved our current seven income brackets (with some changes to their income thresholds). However, the tax rates for some of those brackets was reduced slightly. For example, those in the top bracket will now pay at a 37 percent rate, rather than the previous 39.6 percent. These brackets and their individual percentage rates will remain in effect until 2025.
Many deductions were lost or limited. Slightly lower tax rates might sound like good news, but the flip side is that some deductions were eliminated or limited. Of particular concern is the popular deduction for state and local taxes, which is now limited to $10,000. This is of little consequence to those in low-tax states, but might impact those of you with high property tax bills. Along the same vein, mortgage interest deduction was limited to the interest paid on a $750,000 home; buy a more expensive home, and you can’t deduct the interest on the amount over that limit.
Other deductions were eliminated completely, such as many concerning job expenses or transportation, investment fees, and tax preparation.
But one deduction was expanded. Previously, you could only deduct medical expenses that exceeded 10 percent of your gross income. That threshold has been temporarily lowered to 7.5 percent.
You might elect to take your standard deduction, anyway. Standard deductions for all filing statuses were nearly doubled from their previous levels. Currently, 70 percent of taxpayers take standard deductions rather than itemizing returns. We might see that number rise now that the standard deduction is worth more.
Of course, the best way to assess your own tax situation is to work closely with your tax professional. Each situation is unique, and you need advice geared toward you specifically.
We can also help with tax-friendly financial planning strategies. Call us for an appointment, and we will evaluate options like qualified retirement funds (which can earn you valuable tax deductions) or methods to pursue tax-free income in retirement.