By Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning StrategiesPrint This Post
The time has come for tax season, and recall, this is the first tax year for the Tax Cuts and Jobs Act of 2017 (“Tax Act”). To help you navigate these new waters we will dedicate the next twelve weeks to keep you informed with our “Tax Tip Tuesdays” series. To lead things off, let’s discuss the significant changes brought about by the new Tax Act.
The biggest change this year is that standard deductions are nearly doubled – $12,000 for single filers, and $24,000 for married/joint filers. This should lower taxes for numerous taxpayers, and make it easier to file a return since many will no longer need to itemize deductions. Also helpful is that overall tax rates have dropped, with the top tax bracket dropping 2.9% to 37%
Not all changes will help all filers, though. The Tax Act has removed most itemized deductions of the past, and all personal exemptions have been eliminated. Outside of a few specialized deductions (educator classroom expenses; medical expenses, etc.), the only likely deductions available for most taxpayers will be mortgage interest deductions, charitable deductions and state and local tax deductions. Even so, the state and local tax deductions are limited to $10,000 regardless of filing status. With these changes, some taxpayers may actually see a tax increase this year.
Higher income earners ($200,000 for single filers; $250,000 for married/joint filers) will still owe the net investment income tax of 3.8% on interest, dividends, capital gains, rents and other “passive” income. These taxpayers will also still owe the .9% Medicare surtax for earned income over the $200,000/$250,000 thresholds. On the plus side, though, Alternative Minimum Tax exemptions and thresholds have increased to $70,300 for individuals and $109,400 for married tax payers. The phaseouts have also increased to $500,000/ $1,000,000 respectively.
While there are a lot of new moving parts for this tax season, the IRS recognizes there may be issues. In a recent pro-taxpayer announcement, the IRS stipulated that it is generally waiving the penalty for any taxpayer who paid at least 85 percent of their total tax liability during the year through federal income tax withholding, quarterly estimated tax payments or a combination of the two. The usual percentage threshold is 90 percent to avoid a penalty.
There are a few new issues to be aware of that won’t affect this year’s filing, but that start for the 2019 tax year. New in 2019 is that alimony payments are no longer deductible for the paying spouse, nor must the receiving spouse treat the payments as income on their tax return. Please note these rules only apply to divorces finalized after January 1, 2019. Any existing alimony arrangements and any new modifications to such agreements will be “grandfathered” to the old rules.
Another change for 2019 is that the qualified medical deduction thresholds will increase from 7.5% to 10%. This means that a taxpayer must have qualified expenses exceeding 10% of their adjusted gross income to be able to deduct the excess expenses.
The last change for 2019 is that penalties for failing to maintain health care insurance have been eliminated. Previously, due to the Affordable Care Act, there was a tax penalty (commonly called the “individual mandate”) for failing to maintain adequate insurance. While the individual mandate is still on the books, the penalty has been reduced to zero, meaning no economic impact for failing to meet the mandate.
It’s going to be a unique tax season this year in these new seas. There may be many surprises, both good and bad, when preparing your return. Help is not far away, though. Work with your tax advisor and your Benjamin F. Edwards & Co. financial advisor to get your tax situation in ship-shape form.
Benjamin F. Edwards and Co. does not provide tax advice, therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation.