As you have probably heard by now, Congress finally agreed upon a new tax plan. While your own individual circumstances might vary from the norm, the following breakdown of the most major changes can help you see how the new tax laws might affect you. More importantly, this might help you begin to think about your budget for 2018 and following years.
Standard Deductions versus Itemized Deductions. This is the major change that will most affect taxpayers. The new tax code will include drastically different standard deductions, in the following amounts…
- For single taxpayers, the standard deduction increased from $6,350 to $12,000
- For married (filing jointly) taxpayers, the standard deduction increased from $12,700 to $24,000
- For heads of household, the standard deduction increased from $9,350 to $18,000
Currently, about 70 percent of taxpayers elect the standard deduction, versus itemizing their returns. It remains to be seen whether these new higher standard deductions will encourage more people to forego itemization. At the very least, those who do take standard deductions will be paying income taxes on less of their income.
As for common deductions utilized on itemized returns, many of those have now changed.
Medical expenses. Previously, taxpayers could only deduct medical expenses in excess of 10 percent of gross income. That threshold will revert back to 7.5 percent for the next two years, allowing those who have suffered under high healthcare expenses to potentially recoup a bit more of their losses.
State and local taxes. Previously, taxpayers could deduct state and local taxes such as property taxes and sales taxes. Now, under the new law, that deduction is limited to $10,000 (or $5,000 if you’re married filing separate returns). The major reason this might matter to you: No matter where you currently live, you might be considering a move in retirement. Keep in mind that if you decide upon a state with unusually high property taxes, income taxes, or even sale taxes, your income tax deduction (if you itemize) will now be limited.
Miscellaneous deductions. Many deductions are lost completely, such as those related to tax preparation, investment fees, moving expenses, some transportation expenses, and unreimbursed job expenses. These are things to keep in mind as you create your budget for 2018. Remember that what was once tax deductible, might not be any longer.
Of course, you should always work closely with a tax professional before making any decisions regarding tax planning.