Financial Planning for Individuals in Response to Tax Reform

 In Financial Planning

Financial Planning for Individuals in Response to Tax Reform

In December 2017, Congress passed and President Donald Trump signed into law a sweeping new tax plan, including lower tax rates and fewer deductions.

But how will the new tax law affect you? Should you adjust your own financial strategy in response to possible changes in your own tax bill?

Keep reading to learn about key changes that are relevant to individual taxpayers, along with some considerations to keep in mind when planning your financial future.

Tax Cuts

The new tax plan retains the seven tax brackets that were used under prior law, with tax rates reduced for all but the lowest bracket. Please note that the changes expire in 2025, when tax rates will return to 2017 levels1.

Income Tax RateIncome Tax RateIncome Levels for Those Filing As: Income Levels for Those Filing As:
20172018-2025SingleMarried-Joint
10%10%$0-$9,525$0-$19,050
15%12%$9,525-$38,700$19,050-$77,400
25%22%$38,700-$82,500 $77,400-$165,000
28%24%$82,500-$157,500$165,000-$315,000
33%32%$157,500-$200,000 $315,000-$400,000
33%-35% 35%$200,000-$500,000$400,000-$600,000
39.6%37%$500,000+$600,000+

The tax law doubles the child tax credit from $1,000 to $2,000, for qualified children under 17. The phaseout income for receiving the child credit has increased to $400,000 for those married filing jointly and to $200,000 for single parents2.

Beginning in 2019, the law repeals the health insurance mandate that had been in effect under the Affordable Care Act, also known as Obamacare2.

Changes to Tax Deductions

Although most taxpayers will pay lower rates under the new law, some may see a higher tax bill as a result of changes to or elimination of several key deductions.

  • Standard deduction. Because of this change, it is anticipated that more people will choose to take the standard deduction rather than itemize2.
    • Single or married filing separately: from $6,500 to $12,000
    • Married filing jointly: from $13,000 to $24,000
    • Head of household: from $9,350 to $18,000
  • State and local tax deductions. The deduction for state and local taxes has been capped at $10,0003.
  • Charitable donations. Charitable donations of up to 60% of income may be deducted. Taxpayers may no longer deduct donations to colleges and universities in exchange for the right to purchase athletic tickets2.
  • Pass-through income deductions. You may deduct 20% of pass-through income from a business such as a sole proprietorship, LLC, partnership or S corporation2.
  • Medical deductions. If you have medical expenses greater than 7.5% of your adjusted gross income (AGI), they may be deducted4.
  • Deductions that were eliminated. In addition to changes to existing deductions, the new tax law eliminates several deductions altogether2:
    • Casualty and theft losses, except in the case of a federally declared disaster
    • Unreimbursed employee expenses
    • Tax preparation expenses
    • Moving expenses
    • Employer-subsidized reimbursement for parking and transportation
    • Miscellaneous deductions previously subject to 2% AGI cap

Reviewing Your Financial Plan

Should you stay the course or change your financial strategy in response to the new tax law?  Here are a few things to keep in mind.

  • Study tax code changes. Determine your tax rate as well as which deductions will apply to you. Lower rates may leave you with more money to save and invest, but your tax bill may also increase if you’re affected by scaled back or eliminated deductions4.
  • If your tax bill is higher. If you expect to pay more in taxes, consider boosting the amount you withhold from each paycheck. If you expect to pay less, you can withhold less3. You might also look for opportunities to reduce your taxable income using pre-tax contributions.
  • Review retirement planning. If you have a employer-based retirement plan such as a 401(k), or a private account such as an IRA, you may still contribute pre-tax dollars in order to reduce your taxable income. This may be helpful for taxpayers negatively affected by elimination or scaling back of deductions4:
    • If you have a 401(k) you may contribute up to $18,500 if you’re under 50, or $24,500 if you’re 50 or older.
    • Individuals with an IRA may contribute up to $5,500 before age 50 and $6,500 after 50.
  • Consider education contributions. You may also contribute pre-tax dollars to a 529 education savings account, which has been expanded under the new tax law. While a 529 plan may still be used to cover qualified expenses at a college or university, it may now be used to pay for tuition at a private K-12 school3.
  • Track medical expenses. If you’re not already doing so, begin tracking your medical expenses each year. As noted earlier, if your out-of-pocket costs exceed 7.5% of your AGI, you’ll qualify for a medical expenses deduction4.

Are you thinking about changing your financial strategy? Do you have questions about how new tax policies will affect you?

Contact us at The Resource Center for more information about financial planning that best suits your needs.

Sources:

1 – Amadeo, Kimberly. The Balance. February 5, 2018. Trump’s tax plan and how it affects you. https://www.thebalance.com/trump-s-tax-plan-how-it-affects-you-4113968. Accessed on February 11, 2018.

2 – Frankel, Matthew. The Motley Fool. December 29, 2017. Your complete guide to the 2018 tax changes. https://www.fool.com/taxes/2017/12/29/your-complete-guide-to-the-2018-tax-changes.aspx. Accessed on February 11, 2018.

3 – Shell, Adam. USA Today. January 1, 2018. Financial tips 2018: How to get ahead on taxes, savings and insurance. https://www.usatoday.com/story/money/2018/01/01/financial-tips-2018-how-get-ahead-taxes-savings-and-insurance/985286001/. Accessed on February 11, 2018.

4 – Backman, Maurie. The Motley Fool. January 3, 2018. 3 tax-planning tips to kick off 2018. https://www.fool.com/retirement/2018/01/03/3-tax-planning-tips-to-kick-off-2018.aspx. Accessed on February 11, 2018.

We are not permitted to offer, and no statement contained herein shall constitute, tax or legal advice. Individuals are encouraged to consult with a qualified professional before making any decisions about their personal situation. We are able to provide you with information but not guidance or advice related to federal benefits. Our firm is not affiliated with the U.S. government or any governmental agency.  Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and The Resource Center are not affiliated companies.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. The Resource Center is not affiliated with the US government or any governmental agency. AW01181070

 

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