The New Tax Bill & What It Might Mean For You!

While the new tax bill is complicated and the IRS has yet to issue guidance, here are some of my initial reactions on how the tax law changes might impact my clients.

As you have undoubtedly heard, we have a new tax bill!  The bill itself is very complicated (over 1,000 pages), and it will take many months for both the IRS to issue guidance and taxpayers (and tax preparers!)  to fully understand the law.  Luckily, most of the new rules will not impact the tax return that is prepared this season for 2017, so we have time to learn and prepare.  That being said, I thought I’d share my initial reactions to the changes created by the new tax bill, especially those I think will most impact my clients. 

New Rule - Standard Deduction Increased & Personal Exemptions Eliminated

  • The standard deduction will increase to $12,000 for individual taxpayers and $24,000 for taxpayers filing joint returns.

    • The deduction for taxes (state & local income taxes, real estate taxes, personal property taxes, etc.) is limited to $10,000. 

    • Other deductions are being eliminated and reduced, including unreimbursed work-related expenses and tax preparation.

    • The deduction for personal exemptions are eliminated.

What It Means For You

  • Many of my clients’ itemized deductions will no longer exceed the federal standard deduction, so they will now take the standard deduction amount.  However, they will lose personal exemptions, so it may be a wash or an overall loss of deduction.

  • To get a ballpark idea of how this will impact you, pull out your most recent tax return.

    • Add lines 40 and 42.  This your old deduction.

    • Look at Schedule A.  Add up box 4 (medical expenses), box 15 (interest), box 19 (donations), and box 28 (other).  Add to that the amount in box 9, up to $10,000.  Subtract the portion of box 15 that was for home equity loan interest.  The higher of this amount or $24,000 is your new deduction. 

    • Even if you take the standard deduction on the federal return, you still may itemize on your state’s tax return!

New Rule – Child Tax Credit Is Expanded

  • The child tax credit is being doubled to $1,000, and the phaseout limit has increased dramatically to $400,000.

  • There is a new credit of $500 available for dependents who are not children (over age 17, for instance).

What It Means For You

  • Many clients whose income was too high to qualify for the child tax credit will now be able to claim the credit.

  • Taxpayers with older dependents (including children over age 17, parent dependents, etc.) will get to claim the new $500 credit.

New Rule – Tax Brackets Revised and Lowered, and Alternative Minimum Tax Exemption Increased

  • There are new tax brackets, slightly lower than the old tax brackets.

  • The AMT exemption goes up significantly.

What It Means For You

  • Most (but not all) taxpayers’ tax brackets will go down 2-4%.  Hopefully this will result in a decrease in your taxes, however there are so many other moving parts in this bill that a decrease in tax rates/brackets does not guarantee a decrease in actual taxes paid.

  • Fewer taxpayers will be subject to AMT, so if you have been caught up in AMT in the past, you may be spared in the future.

New Rule – Alimony Deduction & Health Insurance Penalty Repealed

  • Alimony will no longer be deductible (and not taxable for alimony recipients) under divorce agreements made after December 31, 2018.

  • The penalty for not having health insurance is repealed after December 31, 2018.

What It Means For You

  • Taxpayers who have a divorce decree prior to December 31, 2018 will continue to deduct alimony (and claim alimony as income for recipients).  Only new divorces are affected.

  • If you don’t have health insurance, you won’t have to pay the federal penalty (however you will be subjecting yourself to a great deal of risk)!

This is just a tip of the iceberg!  Much more advice and information is to come, especially for businesses.  After tax season, when I have had chance to study the bill, I will be offering tax planning appointments!  I look forward to helping you navigate the new tax landscape in the coming years.

As always, this information is intended to be educational in nature, and does not constitute tax advice for any particular person.  If you need specific tax advice, please contact your Enrolled Agent or tax professional.

Happy Taxes!

Carrie Houchins-Witt, CFP®, EA