Financial Pathways: Think snow, but do taxes (column)
It is that dreaded time of year when we have to start working on our federal tax return. Why do we hate it so much? First, we are afraid that we owe money and secondly, we hate having to find and put together all of the 1099s and other documents needed to prepare a return. Undoubtedly there will be some disparaging self-talk about why we did not keep track of everything throughout 2017 to make it easier now. At least we have until April 17 to mail our return.
On that note, this would be a good time to create your 2018 tax file folders for all the different categories such as medical expenses, property taxes, charitable giving, child care expense, mortgage interest, income, etc. Keep up with expenses throughout the year and tackling your return next year will not be such a chore.
Another reason 2018 taxes may not be as stressful is because of the new tax laws that go into effect for 2018. One of the biggest changes is the standard deduction. Previously the standard deduction for a single person was $6,500 but in 2018 it will be $13,000. For those who are married and filing jointly, it was $13,000 but starting in 2018 it will be $24,000. Head of household was $9,350 and will now be $18,000. Unfortunately the personal exemption of $4,050 goes away in 2018. For some, this will be more of a simplification. In the case of a married couple filing jointly, the $24,000 will probably cover most of the typical deductions they would have itemized. Once they include property taxes (limited to $10,000), their mortgage interest and charitable giving, they may find the standard deduction covers them all. This is particularly true for couples whose home is paid off or who have a small mortgage. The mortgage interest paid will probably determine whether or not a standard deduction, hence less tax preparation, should be used. It has been estimated by the Joint Committee on Taxation that 94 percent of households will take the standard deduction instead of itemizing for 2018 taxes. Currently 70 percent take a standard deduction.
Some other highlights of the 2018 tax reform law include:
Capital gains for individuals
0 percent for single taxpayers up to $38,600 and married filing jointly up to $51,700. 15 percent for singles up to $425,800 and married filing jointly up to $479,000. Above this income level for both categories it goes to 20 percent. The 3.8 percent tax from the Affordable Care Act still applies to the highest income brackets.
Child Tax Credit
For children under 17, this credit has been expanded from $1,000 to $2,000 and a refundable credit is now up to $1,400. The income phaseout has changed and will help many more families: for singles it is $200,000 instead of $75,000 and for married filing jointly it has gone from $110,000 to $400,000.
529 College Savings Plan
Starting in 2018, funds contributed to an account can now be used to cover expenses in private school and for tutoring for a child in grades K-12. This is an important expansion to plan and will greatly affect how funds are used going forward.
Medical expenses deduction
This one is retroactive to 2017 and reduces the required percentage of adjusted gross income from 10 percent to 7.5 percent. This could be helpful now for those who had long hospital stays or a life-threatening illness last year.
Charitable contribution deductions
Tax deductible donations to nonprofits will now be capped at 60 percent of adjusted gross income starting in 2018. This has been at 50 percent and still is for 2017.
Please note that for individuals the changes in the tax reform law are temporary and expire after 2025 tax filing.
These are some of the important highlights, and I will cover more of the changes in my next column. Do start working on your 2017 federal tax return now, and then start thinking about the new tax laws and how they apply to your situation. Consider what adjustments you may want to make during the year to take advantage of, or in some cases minimize, the downside from them.
Nancy Gardner is not a CPA but is a Certified Financial Planner. She and her husband Bill and dog Daisy split their time between Summit County, Colorado and Montgomery, Texas. Please send your questions to firstname.lastname@example.org.
Start a dialogue, stay on topic and be civil.
If you don't follow the rules, your comment may be deleted.