New Tax Law - Here is what you need to know
Joe O'Connor, CPA
President Donald Trump signed the tax reform bill into law today, representing the largest change to the tax code in over thirty years. The new law reduces the tax rate for most individuals, and significantly cuts the tax rate for businesses. Most of the changes go into effect in 2018, so the change will be reflected in your paychecks next year. However, the new law will not impact the tax return you file in early 2018. Below is a summary of the new tax law, how it impacts you, and some helpful tips to lower your current taxes before the law goes into effect. Most of the individual laws are set to expire at the end of 2025.
Standard Deduction vs Itemized Deductions
One major change for individuals is the increase to the standard deduction, $24,000 for joint filers and $12,000 for single filers, up from $12,700 and $6,350. The standard deduction is a fixed amount everyone who files a tax return can deduct. This is in comparison to what are known as itemized deductions. Itemized deductions include mortgage interest, property tax, state and local income tax, and charitable contributions. Once you add up all of your itemized deductions, you compare that to the standard deduction, and you get to deduct the greater of the two. The new tax law will increase the number of people who use the standard deduction, thus reducing the number of people who itemize.
Property Tax and State and Local Income Tax
The new tax law limits the deduction for property tax and state income tax combined to $10,000. This limit applies to the total of both taxes. Since the deduction will be limited next year, it would be beneficial if you could prepay your 2018 property taxes by the end of 2017. That way you can maximize your deductions in 2017, and avoid the limitation next year. Note this prepayment does not apply to state income taxes. Also if you pay your property taxes through escrow with your mortgage, contact your bank to see how you can prepay property taxes.
Other Important Changes and Tips
- The number of tax brackets remains at seven, with the top tax rate dropping to 37%. A chart to compare current tax brackets to the new law is included. If your tax rate is going down, deferring any income until next year may be a good idea.
- The deduction for charitable contributions remains. Consider making any donations to charity before the end of the year, as you may take the larger standard deduction in 2018.
- If you pay expenses for work and are not reimbursed, consider paying these expenses in 2017, as this deduction is being removed.
- The mortgage interest deduction will remain. If you expect to take the standard deduction next year, consider prepaying a mortgage payment this year.
- The deduction for personal exemptions, including dependents, is eliminated. The deduction was $4,050 for each exemption in 2017.
- The deduction for student loan interest will remain.
- The child tax credit increases to $2,000 from $1,000 per child.
- The amount of supplies teachers may deduct remains the same, $250.
- Eliminates the mandate requiring individuals buy health insurance.