The Tax Cuts and Jobs Act of 2018 has made significant changes to our tax laws. In many cases, it will make completing the tax return easier this year for those that will not be itemizing deductions, but it is important to take advantage of some strategies that can potentially result in tax savings when you file your tax return this year.
Some of the changes to the tax law will have a huge impact on families. The personal exemption has been eliminated this year. In 2017, the taxpayer was allowed to take a personal exemption of $4,050 for themselves and for each dependent. For example, a family of five would not be able to take the personal exemption of $20,250 in 2018 that was allowed in 2017.
However, the child tax credit has been increased from $1,000 to $2,000 for each child that is claimed as a dependent and is under the age of 17. Since this is a credit and not a deduction, it reduces the tax bill on a dollar for dollar basis as opposed to simply reducing your taxable income. In addition, the income limits before phase-out for this have been increased from $110,000 for those married filing jointly to $400,000 which will allow many more families to take advantage of this credit. For larger families with incomes exceeding the 2017 phase-out of $110,000, the increased child tax credit will allow greater savings than would have been available in 2017.
Another significant change is that 529 plan withdrawals of up to $10,000 will be available for private, elementary or secondary schools expenses for grades K-12. These plans were previously only an option to be used to pay for college expenses. It is important to check with your individual state to determine if there are any tax consequences at the state level.
For divorced couples, alimony in agreements executed after December 31, 2018 is no longer deductible by the payor and is not taxable income to the payee. Existing alimony agreements are grandfathered in, however. This eliminates the shifting of taxable income to the spouse that was in a lower tax bracket that was available under the previous law.
The standard deduction for married taxpayers filing jointly has increased to $24,000 in 2018. In addition, the SALT deductions have been limited to $10,000. This includes state and local taxes including property taxes. This will be a big change for taxpayers in high tax states such as Illinois. Because of this change, it is estimated that 90% of taxpayers may not be able to itemize their deductions.
There are some strategies that can be used to get over the $24,000 threshold. It is possible to lump charitable contributions into one year as opposed to spreading them over a number of years and can be accomplished using donor advised funds.
Because of all of these changes to the tax law in 2018, it is important to consult with your financial advisor to take advantage of any strategies that may save you money when filing your tax return this year. I would be happy to meet with you to discuss your unique financial situation and how these changes in the tax law might apply to you.