After much bickering and fanfare, we have a new tax law. Of course, like everything else in our society, today there is much partisanship when it comes to whether this law is good or bad. My view is that no matter what side of the political divide you fall on, the one thing that you should accept is the fact that politicians on either side of the isle have no credibility. It would be nice if our politicians could focus on what’s good for the American people; however, that is too much to ask. All they are concerned with is attacking the other guy. That being said, over the next few weeks I will try to highlight certain parts of the new tax law and let you make your own decision as to whether it’s a good law or not.
Whenever we have a change in tax law there are going to be winners and losers. However, it’s not that easy to decide who the winners or losers are. After all, everyone’s tax situation is different. Therefore, once again, I will leave it up to you to decide how the new tax law affects your individual circumstances.
This tax law is very comprehensive and the changes affect both business and individuals. Today I will highlight some of the changes that will affect us as individuals. In that regard, it’s important to remember that this tax law takes effect in January of 2018 and thus, there will be no impact on how you file your 2017 tax return.
Under current law, we have seven brackets; the lowest is at 10 percent and the highest is at 39.6 percent. Under the new law we will continue to have seven brackets; however, the lowest bracket will remain at 10 percent but the highest bracket will be reduced to 37 percent. The major change for individuals comes on the deduction side. Under the new law, if you are single the standard deduction will be $12,000 while if you’re married, it will be $24,000; this is nearly double what the deduction is currently. About two-thirds of American taxpayers take the standard deduction currently. Because the standard deduction is nearly doubling, the result will be that more American taxpayers will be taking the standard deduction. For many, this will result in a significant tax savings as well as reduce the cost in having their tax returns prepared. Filing tax returns where you’re taking the standard deduction is significantly easier than when you itemize your deductions.
From a deduction standpoint, many taxpayers will find that they have lost certain deductions. First, the amount you can deduct for state and local taxes is limited to
$10,000. In addition, this new tax law will eliminate miscellaneous deductions. Miscellaneous deductions included things such as employee business expenses and financial advisory fees. Therefore, if you’re an individual that took a large amount of deductions, even though you may find that your tax bracket is a little lower, the taxes actually may go up because of the loss of deductions.
There is another provision in the new tax law that has gotten no publicity but can be a significant benefit to many families. Under the old tax law, 529 Plans such as the Michigan Education Savings Plan, can only be used for post-high school education. Therefore, if you wanted to send your child to a private or parochial high school or elementary school, there were very few tax efficient options. However, under the new tax law, you will be able to use up to $10,000 a year from a 529 Plan for pre-college education. Therefore, if you wanted to send your child to a parochial high school, you could now use the 529 Plan as a very tax sufficient saving vehicle.
One last thing about this new tax law is that it eliminates the mandate to buy healthcare. Under current law, if you did not have a healthcare plan you would have to pay a tax penalty. Under the new tax law that is eliminated.
The aforementioned was not meant to be a comprehensive look at all the changes in the tax law. Rather, it was meant to give you a flavor of some of the major areas that I believe will impact you and me as individuals. Over the next few weeks, I will highlight other areas of the tax law and I encourage you to learn how the tax law will affect you. Yes, there will be winners and losers; however, the more you understand the tax law, the more you can benefit from it.
If you would like Rick to respond to your questions, please email him at Rick@bloomassetmanagement.com.