It’s that time of year again where you begin the dreaded annual act of paying Uncle Sam. Or, in some cases, the arduous task of getting a small piece of the money you already paid sent back in “refund” form. The Tax Cut & Jobs Act has plenty of great features. Though most people don’t know that many of the changes are only temporary, while others are permanent. Despite what you may hear the tax package has done a great deal to help what was an otherwise flailing American economy after 8 years of over-regulation by President Obama, and an uneven hand from the Bush Administration. It’s been a life raft to American small businesses that employ the majority of people in this country. For 2 million+ Americans it’s the reason they received a bonus, or still have their job today.
While you fulfill your tax obligations it’s a great time to review personal finance goals, and re-tool investment strategies as tax laws change. For example if you have been fortunate enough to max out your IRA each year, $5,500/yr for those under 50, you’ll be pleasantly surprised to find out you can save a maximum of $6,000/yr in 2019.
I’ll detail changes that most likely to relate the majority of your tax, investment, & planning needs. For a more detailed overview from the IRS please see their summary guidelines for Individuals & Families(here), and for Businesses(here). If reading about taxes ain’t yo thing, and you would simply love for me to handle it for you head straight to the Contact Page.
Itemized/Standard Deductions
Starting in 2018 individuals will receive a $12,000 deduction. Here is a table breaking it down for everyone.
Single……………………………………………………… $12,000
Married Filing Jointly, Qualifying Widow(er)………………$24,000
Married Filing Separately…………………………………$12,000
Head of Household………………………………………..$18,000
Note these amounts are higher if you are over age 65, or blind.
In exchange for a higher standard deduction there has been an overhaul of itemized deductions. For example there is no longer an itemized deduction cap based on your Adjusted Gross Income. However, there is now a cap on the amount of State, Local, & Property tax you can deduct which is $5k for individuals and $10k for Married couples.
The highly coveted home mortgage interest deduction has been modified. For loans taken out before December 15, 2017 you can deduct interest on up to the $1 million in qualifying debt. If your loan was after that date it’s now limited to $750,000 in qualifying debt. So for any homeowner that couldn’t get the paperwork finished by just one day is now stuck with a higher tax bill. Furthermore any interest on a home equity line of credit is no longer deductible UNLESS you used it to specifically buy, build, or substantially improve your property. So people can no longer use a HELOC to pay off credit cards, or pay for vacations while getting tax deductible interest.
For rental real estate property owners there is no change to deducting state & local taxes. There is also additional information related to rental real estate property owners below.
Exemptions
There are no longer any personal exemptions for your spouse or dependents(such as children).
Retirement Plans
This is especially important for my clients, and there are quite a few changes for 2018 related to retirement plans, and even increased contribution limits for 2019.
Most important are the contribution limits for 2019. This allows a person to save more at their employer or on their own.
- 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan is increased to $19,000/yr. Catch-up contributions if you are over 50 remain unchanged at $6,000. Also an employers contributions to a 401(k) for the year will be capped at $37,000 for a $56,000 total contribution.
- Traditional & Roth IRA’s are increased to $6,000/yr, and if you are over 50 the $1,000 catch-up contribution is unchanged.
- SEP IRA plans have a $56,000 contribution limit
- SIMPLE IRA plans will have a $13,000 limit.
Now it gets slightly convoluted if you, or a spouse are covered by a workplace retirement plan. You then have different phaseouts on deductible contributions for the following scenarios:
- For single taxpayers covered by a workplace retirement plan, the phase-out range is $64,000 to $74,000, up from $63,000 to $73,000.
- For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $103,000 to $123,000, up from $101,000 to $121,000.
- For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $193,000 and $203,000, up from $189,000 and $199,000.
- For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Of course there are special rules for contributing to a Roth IRA based on your income. Earning to much will prohibit you from contributing directly to a Roth account under the following scenarios:
- The income phase-out range for taxpayers making contributions to a Roth IRA is $122,000 to $137,000 for singles and heads of household, up from $120,000 to $135,000. For married couples filing jointly, the income phase-out range is $193,000 to $203,000, up from $189,000 to $199,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
Re-characterization of a Roth Conversion is no longer allowed from a Traditional IRA, SEP, or SIMPLE account. Previously if you converted funds from pre-tax to post tax you could go back and reverse the decision if circumstances changed, not anymore. Also you can no longer directly re-characterize a pre-tax contribution from other retirement plans such as a 401(k) or a 403(b) directly to a post tax Roth IRA. In essence you’d now have to move funds from your employers plan, into your Traditional IRA, and then into the Roth. So if you decide to convert any funds from pre-tax to post-tax you’re now stuck with that decision for life even if your circumstances change.
If you have Qualified Retirement Plan loan, and leave employment(or plan is terminated) your sponsor may offset your account balance by the outstanding loan amount. If the plan loan offset is due to plan termination(or severance from employment), instead of the usual 60-day rollover period you have until the due date, including extensions, for filing the Federal income tax return for the taxable year in which the offset occurs to complete your rollover. I work hard with all my clients to put them in a position that they will not need to take a loan from their retirement funds.
If you’ve been affected by a qualified disaster new laws make it easier for you to access your QRP funds by waiving the 10% tax on early distributions, extend loan repayment, and include a hurricane related distribution to your income over a 3 year period to name a few.
Changes to the education 529 plans now allow a plan to pay for up to $10k/yr(regardless of the number of contributing plans) for all qualified expenses at a K-12 institution. This basically means you can use the funds for private school, books, fees, etc., which is huge.
Qualified Business Income Deduction
This is especially important for the majority of American small business owners that are self employed, partners in partnerships, shareholder in an S-Corp, or a beneficial owner of a trust. The deduction starting in 2018 allows you to deduct the lesser of:
- 20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income, or
- 20 percent of taxable income minus net capital gains.
Of course there are income limitation so your income must fall below $315,000 for joint returns and $157,500 for other taxpayers.
In order to qualify your business must NOT be a specified service or trade business(SSTB). If it is then there is actually a different formula you follow(more information here). There is a whole list of companies that are considered SSTB’s, and those that are not.
Rental real estate property investors will qualify for the deduction, however there is a caveat. Your business must meet a slew of qualifications in order to be considered. Here are some highlights:
- You must maintain separate books & records for reach property, and the records must be very detailed & specific.
- 250 hours or more must be dedicated to the rental enterprise(with rules on what consists as work performed) which goes back to have specific records
- A property you live in for more than 14 days throughout the year will not qualify.
Pssst…Ask MAD Wealth about our Income Producing Property Analysis tool for new buyers.
Well that was fun reading for everyone, right? I know, I know. Tax stuff like this is only interesting to those of us who find boring things fun, or enjoy falling asleep while reading! But these rules are very important to know. When it comes to your finances understanding tax law is paramount to your success. Knowing a pitchers ERA, or a sluggers OBP won’t help you pay for retirement, or Uncle Sam, so it’s best to educate yourself on the basics.
If you are looking for additional guidance on how you can take advantage of these changes then please reach out to MAD Wealth via our Contact Page. We can develop a customized plan to help your navigate your personal financial needs in conjunction with new tax laws. Adapting the new rules to your personal situation might save you untold thousands in the ensuing years, or cost you dearly. Which path will you choose?
