This is the first tax filing season under the tax law passed in 2018. A lot has changed.
The only itemized deductions that remain today are mortgage interest, charitable contributions, up to $10,000 for state income or property taxes, and medical expenses that exceed 7.5 percent of Adjusted Gross Income (AGI). All of the others have been eliminated.
Personal exemptions for dependents also have been eliminated, which means you don’t get a deduction for your children anymore. Instead, a higher tax credit is available for all children under the age of 17 – a $2,000 credit per child (previously, it was $1,000 per child).
The standard deduction has increased to $24,000 for married couples ($12,000 for singles; $18,000 for head of household). As a result, many people who itemized deductions in prior years will not itemize this year. If you are free of a mortgage and your medical expenses are not high, you will probably use the standard deduction.
Watch out. Interest on home equity lines of credit is no longer deductible, unless the proceeds were used for home improvement. The maximum amount of your mortgages cannot exceed $1 million, unless the mortgage originated in 2018. In that case, the limit is $750,000. Any interest on balances above that is not deductible.
The Good News
There is very good news for people who live in the Metro DC area (and other high tax states): the Alternative Minimum Tax (AMT) has changed significantly. The modifications will result in zero AMT for most taxpayers whose income is under $1 million. To determine whether you were hit by AMT last year, look at Line 45 of your 2017 tax return. If there is a number on that line, you paid AMT (and you will save roughly that amount in taxes in 2018, if nothing much has changed).
More good news: tax rates have come down. You will pay less taxes on the same amount of taxable income. And 529 plans were expanded to include tax-free withdrawals for private school education, prior to college.
What Can You Do?
- Pay off home equity lines of credit, especially if you used it to pay for college, buy a car or any other expenses that were not home improvement.
- Combine or “bunch” charitable contributions – do more in some years and less in others. Utilize a Donor Advised Fund or Qualified Charitable Distribution from an IRA (if age 70-1/2 or older).
- Maximize retirement plan and health savings account contributions – these continue to be the best tax breaks available.
- Maximize 529 plan contributions.
- Retirees should optimize withdrawals from taxable and pre-tax accounts in order to manage AGI, to keep their Medicare Part B monthly premium as low as possible.
Financial Advisor, Savant Capital Management