It happened just before Christmas, so maybe you missed it: Congress did indeed finally agree upon a bill to overhaul our income tax structure. Or, perhaps you’ve heard the news, but you’re wondering how exactly it will affect you.
With such complicated legislation, it can be difficult to know exactly how everything will pan out, but here’s what we do know at this point…
We still have seven income brackets. The original idea was to compress income brackets down to only four, but that idea apparently didn’t make it through to the final writing of the bill. However, the taxation rates for some of those brackets has fallen just slightly. The bottom bracket remains at a 10 percent tax rate, while the top bracket (over $500,000 annually, or $600,000 for married couples filing jointly) has dropped to 37 percent. Your own tax bracket might have changed slightly.
Standard deductions were nearly doubled. Previously, about 70 percent of taxpayers utilized standard deductions rather than itemizing their returns. Now, with nearly doubled standard deductions, we might see that number rise (although it’s too early to know for sure).
- The standard deduction for single taxpayers was increased from $6,350 to $12,000
- The standard deduction for married taxpayers, filing jointly, was boosted from $12,700 to $24,000
- The standard deduction for heads of household grew from $9,350 to $18,000
Some deductions were eliminated or changed. For those who continue to itemize their returns, we have a mix of good and bad news. The medical expense deduction was widened a bit, now allowing taxpayers to deduct all expenses beyond 7.5 percent of gross income (previously the threshold was 10 percent). On the other hand, your deduction for state and local taxes (such as property taxes) is now limited to $10,000. Other deductions, like those related to tax preparation, certain job expenses, and investment fees, were eliminated completely.
Luckily, one of the most meaningful and helpful income tax deductions remains intact. You can still deduct contributions to qualified retirement accounts, and the contribution limit was even extended just slightly (to $18,500 per year). If you aren’t currently contributing the maximum amount each year, or need help with other retirement planning issues, give us a call and we’ll be happy to help you make the necessary changes.