Wealth Management

In 2018, the Tax Cuts and Jobs Act, also known as the TCJA, officially went into effect. The 2018 tax bill didn’t affect 2018 tax refunds, but it will certainly affect 2019 tax refunds. It’s important to understand a few major factors in order to adjust financial plans accordingly.

Note: this is not a comprehensive summary of the Tax Cuts and Jobs Act, nor is it intended to provide advice. It is simply meant to make taxpayers aware of what they might expect when filing their taxes this year.

5 Major Effects of the 2018 Tax Bill

1. Income Tax Brackets

First and foremost is the income tax brackets. There are still seven income tax brackets. Taxable income in each bracket has increased slightly from the previous year to adjust for inflation, but most tax brackets now have a lower income tax rate.

The new United States income tax brackets are:

Rate

Single filers

Married couples filing joint

Head of household

Married filing separate

10%

$0 - $9,525

$0 - $19,050

$0 - $13,600

$0 - $9,525

12%

$9,525 - $38,700

$19,050 - $77,400

$13,600 - $51,800

$9,525 - $38,700

22%

$38,700 - $82,500

$77,400 - $165,000

$51,800 - $82,500

$38,700 - $82,500

24%

$82,500 - $157,500

$165,000 - $315,000

$82,500 - $157,500

$82,500 - $157,500

32%

$157,500 - $200,000

$315,000 - $400,000

$157,500 - $200,000

$157,500 - $200,000

35%

$200,000 - $500,000

$400,000 - $600,000

$200,000 - $500,000

$200,000 - $300,000

37%

$500,000 and above

$600,000 and above

$500,000 and above

$300,000 and above

 

Remember that these tax rates are marginal. That means a single filer who made $80,000 in 2018 would be taxed at 10% for the first $9,525 of their income, 12% for the $29,175 and 22% for the next $41,300.

2. Increased Standard Deduction

For the tax years 2018 through 2025, the standard deduction is $12,000 for single filers and $24,000 for married couples filing jointly. This is nearly double the previous standard deduction.

Since taxpayers may choose to either itemize their deductions or take the standard deduction, this increase will likely lead to fewer people itemizing in the future. The best choice will vary from person to person.

3. Updates to State and Local Tax Deductions

One of the largest changes under the 2018 Tax Bill is to state and local taxes (SALT). Now, taxpayers who itemize their deductions will be able to deduct their state individual income, sales and property taxes up to only $10,000.

Previously, the deduction was unlimited, but filers had to choose to either deduct individual income taxes or sales taxes. This change to SALT will also likely result in more people taking the standard deduction.

4. Mortgage Interest Deductions

Taxpayers are not limited to deducting mortgage interest on the first $750,000 of debt related to acquiring, building or improving their primary or secondary residence that is secured by a mortgage.

Before the 2018 tax year, taxpayers could deduct interest on the first $1 million, and any mortgage debt used for other purposes was deductible for the next $100,000 of the principal. Loans that began before December 15, 2017 are still subject to this rule.

5. Estate and Gift Tax Deduction

For individuals who have passed away and/or made gifts in 2018, estate and gift tax exemptions are $10 million, which equates to approximately $11.2 million accounting for inflation. For married couples, the number is $20 million, which equates to approximately $22.4 million accounting for inflation.

It’s highly recommended that you seek the help of a tax professional to do your taxes this year. In addition, you should update your financial plan accordingly to maximize your gains next year.

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