As you settle into the project of doing your 2017 taxes, it’s a good time to look ahead to the return you will file next year at this time. Some of the changes in the tax laws create opportunities for tax savings —if you start now.
Next year’s tax return is likely to be easier to file. In 2018, people who are married and filing jointly will have a standard deduction of $24,000 — up from $12,700 currently. And single taxpayers will have a $12,000 standard deduction — up from $6,350 in 2017. That means, itemizing deductions might not be so valuable next year. (Charities are worried that you’ll stop giving, once you notice that you aren’t using the deduction.)
There will no longer a personal exemption (which would have been a $4,150 per person deduction). But the child tax credit has been increased to $2,000 per qualifying child under age 17, up from $1,000.
And, of course, all tax brackets are lower on income earned in 2018. The new top tax rate is 37 percent — and it applies to singles with income over $500,000 or couples filing jointly with income over $600,000. Even those with lower earnings will see the benefits of a tax cut in their paycheck.
Leaving all economic arguments aside, most people — except those who live in high-tax states and can no longer deduct more than $10,000 for state income, property and sales taxes — should find not only that their returns easier to file but also that they are left with more money in their paychecks.
And that’s where there are opportunities to increase retirement savings and pay down debt. The time to consult a tax adviser is now, to make sure you make the best of your situation and to make sure you avoid some hidden pitfalls.
Pitfalls: Beware of home equity loans
One of those pitfalls has to do with deductibility of interest on a home equity loan. The IRS has just clarified some confusion created by the wording in the tax law.
Under the new law, mortgage interest is not deductible for mortgage amounts over $750,000 — down from $1 million previously — for loans taken out after December 15, 2017. The new tax law suspends until 2026 the deduction for interest paid on home equity loans and lines of credit — unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.
Thus, if you take out a home equity loan (up to a total of $750,000 in loans on your residences) and use the money to update your kitchen, the interest is still tax deductible. But if you use your home equity loan to pay your child’s college tuition, or to pay off student loans or pay down credit card debt, the interest on that home equity loan will not be deductible. It seems to me that the IRS is going to have a tough time delving into people’s personal finances to make sure loan money is used appropriately, but that’s the IRS’ interpretation of the law!
Potential benefits: Enhanced retirement plan opportunities
In 2018, you can contribute more to your workplace retirement plan — $18,500, up $500 from last year’s limit. Now is the time to adjust your payroll contribution to take advantage of the higher limit, and to make sure you divide your payments equally over the year to get the maximum employer matching contribution.
And if you can discipline yourself to contribute to a non-deductible Roth IRA, the law now makes those accounts available to people with higher incomes. For single taxpayers, the income eligibility starts phasing out at $120,000 and you are no longer eligible for a Roth with income over $135,000. For married couples the income phase-out range is $189,000 to $199,000.
Remember, Roth contributions are not tax deductible, but the account grows tax-free for retirement. The maximum you can contribute in any year is $5,500, unless you are age 50 or older, in which case you can contribute up to $6,500 to any type of IRA.
Don’t let that extra money in your paycheck go down the drain in new spending. Instead, plan now to make the money work for you. That’s better than leaving it with the government. And that’s The Savage Truth.