How the New Tax Plan May Affect You!

Before I get into details, there are plenty of websites and sources you can access that will provide the list of changes in H.R. 1 Tax Cuts & Jobs Act relative to current law, so there is no need to rehash all of the specifics here. Given the many misrepresentations I have seen regarding how the new law may affect you, however, my goal with this blog is to give you a good guideline to help you estimate your new tax liability relative to what you paid previously (use your latest 1040 tax return for this comparison). H.R.1 will reduce taxes for most of our clients. Some will see a small increase in their tax bill, which will hopefully be offset through improved economic growth and expanding financial markets. Of course, all of your advisors at Hudson Dynamic Retirement are well versed on the new law, and analyzing specific changes and how they affect your financial plan will be part of all comprehensive client reviews in 2018. No doubt your accountant will be chiming in at some point as well. If however, you don’t want to wait for your review or you want to simply have some idea now how you will be affected, read on!

The new tax plan will impact our clients to varying degrees. The major factors contributing to the bill’s effect on your tax liability mainly depend on filing status (single, married-jointly, etc.), your current itemized deductions, and the number of claimed dependents. The following focuses on specific changes regarding these factors:

Tax Rates & Filing Status – As in previous years, tax rates for 2018 will be calculated on a “graduated scale.” This means that some of your “taxable income” (line #43 on your 1040 and is calculated AFTER your tax deductions)

will be taxed at 10% up to a certain level, then 12%, and so on. Based on taxable income alone, these rates are measurably lower with the new plan. In the chart below, “Income” refers to “taxable income.”

The first step in your tax calculation process is to determine how the new law affects your current tax deductions. Subtracting these deductions from your gross income determines your “taxable income.” Here are some of the main items on which to focus:

$10,000 Limit to the State & Local Income Tax Deduction – For those who “itemize” their deductions instead of taking the “standard deduction,” the combination of state, local and sales taxes is limited to a maximum of $10,000. These totals are indicated on your “Schedule A – Itemized Deductions” page on your 1040 ($4,566 in this example).

If the total on line 9 of this section on your 1040 is greater than $10,000, take the amount in excess of $10,000 and subtract it from your “Total Itemized Deductions” on line 29 on the same Schedule A Itemized Deductions page (see just below). If it is lower, there will likely be no change to your Total Itemized Deductions since there are no other changes affecting itemized deductions for most taxpayers (the itemized deductions can potentially increase if you are under 65 and have high out of pocket medical costs in 2018 and 2019 or decrease if you have out of pocket, uninsured losses on home and property damage). 

Increases to Standard Deductions – The next step is to determine if the new “standard deduction” is more beneficial in reducing your taxable income than itemizing your deductions; after considering the changes to your Total Itemized Deductions indicated above. The new standard is $24,000 if married filing jointly and $12,000 for single filers. These deductions are increased from $12,700 and $6,350, respectively (for 2017). If your new Total Itemized Deductions are greater than the new standard deduction, you deduct your itemized deductions from your gross income to calculate your taxable income. If the standard deduction is greater, you would use that as your deduction from gross income.

Personal Exemption & Child Tax Credit – The personal exemption deduction for individuals, dependent spouses, and children is eliminated under the new plan ($4,150 per person in 2017). This is a big one for most retirees. Married couples with “Adjusted Gross Income” that doesn’t exceed the current threshold limits of $313,800 to $436,300 and singles filers’ limits of $261,500 to $384,000 (could not use the deduction above these income levels), will have to increase their re-calculated “taxable income” due to this loss ($4,050 per person for a 2016 comparison). These lost deductions will affect those with dependent children even more, although the new Child Tax Credit could more than offset this increase (explained below). You can find your “Adjusted Gross Income” (AGI) on the top of page two of your 1040 line 37 & 38.

Based on the information above, once you have a close estimate of your total “taxable income,” click this estimating your tax bill link to see what your new tax bill may look like before any child tax credits (if applicable). Of course, you can use the Rates & Brackets chart above to for a more precise tax calculation.

If you do not have kids in the home, the following benefit does not apply. For families with dependent children under age 17, there is a significant positive change with the new law that will allow you to reduce your tax bill further. Previously, these filers could take a $1,000 per child “tax credit” if their “Adjusted Gross Income” (see above) threshold limit of $110,000 for joint filers or $75,000 for individual filers was not reached (phased out $50 for every $1,000 of AGI over these thresholds). As a reminder, tax credits are more advantageous than tax deductions since a credit is a dollar for dollar reduction from your tax liability instead of simply reducing your income that is subject to taxation. Under the new plan, the tax credit is doubled to $2,000 per child and the threshold limits are increased to $200,000 for single filers and $400,000 for married couples filing jointly. Your total child tax credit (if applicable) should then be deducted from your estimated tax bill calculation. Many more people will be able to take advantage of this tax credit with the increased thresholds.

These are only the highlights which impact most of our clients. High earning S-Corporation owners (with non-professional service related businesses) may benefit significantly more with further tax rate reductions on a portion of net profits. Others may pay more – specifically, high-income individual filers with high real estate taxes. Either way, it is my opinion that the effect the changes will have on corporate profits, economic expansion, and subsequent hiring and wage increases will be a net positive for those working for a living or are relying on their investment portfolio to help fund their retirement. Also, I know many of you read our email notifications and blogs over the last two months regarding the new tax law, and I hope you were able to prepay your 2018 state income taxes and property taxes before year-end as recommended. 

We look forward to your 2018 comprehensive review. Please forward (or have your accountant forward) your 2017 tax return once it is filed for a thorough analysis as part of your review. We recommend filing in mid-March to account for 1099 revisions that may be sent after the initial 1099s are produced.

Best wishes for a happy and prosperous 2018!