By Dennis O'Keefe on Apr 19, 2018
Last time, we discussed the funny sales tax laws in Massachusetts and some information regarding corporate income tax changes. You can click HERE to catch up if you need to.
This issue, I’d like to focus more on the changes in 2018 to our individual income taxes. The news is good, but it’s been muddled by many in the media and Congress to push their own agenda versus the truth. My goal is to give you the truth so we can plan properly for next April 15.
While there was a myriad of changes to the tax code (which started out as a tax-simplification act and did anything but), there are three major changes you should be aware of that may affect your taxes.
For the vast majority of us, we will pay less taxes in 2018 than we did in 2017. Let me say that again – because in talking with several clients, they don’t believe this. For the vast majority of us, we will pay less taxes in 2018. This is due to the first major change – a reduction in the tax brackets.
My hope last year was we would compress the brackets from 7 to 3. That just wasn’t the case, unfortunately.
The 10% bracket stayed the same. The 15% bracket dropped to 12. The 25% bracket dropped to 22% and also has been expanded slightly. The 28% bracket dropped to 24% and expanded significantly. The upper brackets also dropped a smidge and expanded a bit.
Overall, those married couples making less than $30,000 per year (and pay zero taxes annually) saw no change in their taxes. But those making between $30,000 and 300,000 saw a significant tax savings based on brackets alone.
Let’s go back to the rhetoric again. One camp says that the larger tax breaks are for the middle-class Americans. The other says that most of the breaks are for the “fat-cats.” (I love that phrase. It makes me chuckle. It’s like a Garfield comic.)
Both of these are true! So your favorite cable news anchor isn’t lying. . . . per se. It’s a lie of omission. . . which I guess doesn’t count in cable news.
If you look at the cuts as a percentage of the taxes paid in 2017, lower-income taxpayers are seeing huge cuts. Think about it: The 15% bracket drops to 12. That’s a 20% cut in the taxes. For a married couple making $100,000, their tax burden will drop 18%. The same couple making $75,000 will see a 22% drop in their taxes. A married couple earning $400,000 but taking no unusual deductions would see about a 15% reduction depending on their circumstances.
The higher your income, the lower the tax savings is, as a percentage of your previous year’s tax burden.
But we could look at this another way: A smaller percentage of a big tax bill is bigger than a big percentage of a small tax bill. Let's look at that $400,000 couple and $75,000 couple again.
What we find is that 15% of a $100,000 tax bill is worth considerably more than 22% of $7,200. The higher earner will get more money back because they pay a lot more. They will get 5, 10 or 20 times more money back than the average middle-class taxpayer.
You can make the numbers look any way you like. The truth is that lower earners are getting a larger percentage of their 2017 taxes back in 2018 and higher earners are seeing larger absolute reductions in their taxes. Virtually everyone is seeing tax savings!
The second big change is how we use the Standard Deduction. In 2017, the standard deduction for a married couple was $12,700. For 2018, that amount has almost doubled to $24,000.
There is a catch: There are no more personal exemptions. It doesn’t matter if you have 2 or 50 people in your household. $24,000 is all the standard deduction will provide you.
How is this going to change your tax filing in 2018 and beyond? If you are a married couple with no kids, your standard deduction just got bigger. Couples with just one child will see no change in the deduction. But once you have a 4th person in your family unit, you were better off under the old rules.
Limits To State & Local Tax Deductions
The final major change to the tax code relates to those few that would still benefit from itemizing their deductions.
Until this year, those that itemized their deductions could count on a 100% deduction of all state and local income taxes. This includes your property taxes, excise taxes, and state income taxes. Starting this year, taxpayers are limited to a 10,000 maximum deduction.
This will not affect many Americans, but for the ones that are affected, it will hurt. Working families in Massachusetts and other Northeast states are particularly vulnerable to this due to the prevalence of state income taxes, higher wages versus the rest of the country and higher property tax bills. Two professionals with a nice home in a nice town might end up paying an extra $2,000 or more in federal income taxes.
Your best bet to see if this affects you in 2018 is to review your Schedule A. While most retirees will never encounter this problem, it’s a good idea to double check.
What Should We Do Now?
The big question moving forward is: what will my taxes look like in 2018. This is a fantastic time to review. You probably just had your 2017 taxes done, so the paperwork is fairly close at hand. All you’ll need to do is check the itemized deductions, make adjustments to your taxable income and use a 2018 Tax Table to determine how much you will save.
From there, you can check your current 2018 withholdings on your paycheck, Social Security and/or pension check to be sure any adjustments in those will be adequately accounted for come next tax season.
You can certainly have your CPA do this for you as well, now that their “busy” season is over. Or just give us a call. We can review your taxes for 2018 and beyond at our next meeting. Or our first meeting, if that is the case.
Thank you for your time this week. If you have any questions or concerns, please don’t hesitate to email us at firstname.lastname@example.org or call us at (800) 453-3209. If you don’t already have a copy of my book, The Biggest Financial Mistakes Retirees Make, you can order it on Amazon or click here and we will get a copy out to you, free of charge!
To receive blog updates via email, click here.
This blog is the opinion of Successful Money Strategies, Inc. and is provided for informational purposes only and is not intended to provide any investment advice or service. Statistics and other figures are accurate at the time of original publishing. Any advice herein should not be acted upon without obtaining specific advice from a licensed professional regarding the readers own situation or concerns. Always count your change.