Will the New Tax Reform Bill Impact Me? Part 2

Check out the video log on this topic: Tuesday’s Tax Tips Vol 1 Ep 3 041718

Personal Exemption Changes

Part 2 of 4

As explained in last week’s blog, the short answer is: YES! The logical second question is: will that impact be to my benefit or detriment? There is no short answer to that question, but we’re giving you the tools to help you determine if you are a big winner…or, a big loser.

FACT: The new tax reform bill will impact every taxpayer in the country due to elimination of the personal exemption.

When it comes to this change, everyone is a loser.  The personal exemption was granted to all taxpayers in every tax return.  For the 2017 tax year, the personal exemption equaled $4,050 and was applied to the taxpayer, spouse and dependents.  For example, a family of four would receive a total personal exemption of $16,200 [calculated as $4,050 x 4].  The personal exemption serves to exempt or exclude that amount from your taxable income.  As we described in last week’s blog, your taxable income dictates which tax bracket you will fall into.  This change will serve to increase everyone’s taxable income which will impact you in the following two ways.

First, this change will increase the amount of income you have that is subject to tax. Considering only this change, if your income remained the same in 2018 compared to 2017, your tax bill would increase.  Using our same family of four referred to above, the loss of the $16,200 exemption would increase the family’s taxable income by that same amount.  If we presume this two-income family had taxable income of $150K in 2017, they would fall in the 28% tax bracket.  The loss of the personal exemption means their taxable income would rise to $166,200 [calculated as $150,000 + $16,200].  As a result, their income tax bill would increase by at least $4,536 [calculated at $16,200*28%].

Second, this change would also bump the family into the next higher tax bracket.  Expanding this same example, the family’s income of $150K in 2017 landed them in the 28% tax bracket.  However, based on the new tax brackets, and their new higher taxable income of $166,200, this family would now land in the 32% tax bracket.  This would result in a total income tax increase of $5,184 [calculated at $16,200*32%].

In essence, that means even at the lowest bracket you can expect to see your tax bill go up by a minimum of $405 [calculated at $4,050*10%].  According to IRS statistics, the median household contains 3 people and falls into the 24% bracket for 2018.  That means the median household would experience an increase of $2,916 in their tax bill based on the loss of the person exemption [calculated at $4,050*3*24%].

Take a look back at last week’s post to identify the ways you can reduce your taxable income using pre-tax contributions.  Another approach to reducing taxable income is maximizing your adjustments to income.  These are commonly referred to as “above-the-line deductions” or deductions to arrive at AGI. Here are the top 3 adjustments that would serve to reduce your taxable income:

  1. Individual Retirement Account (IRA) Contributions: If you are not covered by an employer’s plan, you can deduct contributions to a traditional IRA up to $5,500 for 2018, or $6,500 if you’re 50+.
  2. Health Savings Accounts (HSA) Contributions: Individuals can deduct contributions up to $3,450 for self-coverage, or $6,850 for family coverage.
  3. Student Loan Interest: You can deduct up to $2,500 of student loan interest paid.

Bear in mind, this post isolates the personal exemption for a simplified explanation of this change.  The ultimate change to your tax position must consider all changes in the new bill, including the change to brackets covered last week, and deductions.  We’ll go over that element of the new tax bill in next week’s blog.  And remember, when you’re ready to do more to reduce your tax bill, contact us to develop a custom tax plan tailored to your specific tax needs.  We’ve helped our clients employ tax loopholes that allow them to deduct 100% of their student loan payments, not just the interest!

 

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Will the New Tax Reform Bill Impact Me? Part 1

Check out the video log on this topic: Tuesday’s Tax Tips Vol 1 Ep 2

Tax Bracket Changes 

Part 1 of 4

The short answer is: YES! For some, it will have a positive effect.  But for others, it will result in a tax increase.  We’re giving you the tools to help you determine if you are a big winner…or, a big loser.

FACT: The new tax reform bill will impact every taxpayer in the country due to tax bracket changes.

Right now the focus is on 2017 tax returns, therefore most taxpayers have not looked ahead to understand what the new tax reforms will mean for them.  That means many people may be surprised about this time next year when they’re preparing their 2018 tax return.  Given that, we want to help you avoid surprises and break down some of the ways the tax reforms will affect us all.

The first is due to the change in the tax brackets and the tax rates.  The new bill drops the top rate from 39.6% to 37% impacting single filers whose taxable income is over $300K. Meanwhile, the bottom rate remains at 10% and a new rate was established at 12% impacting single filers whose taxable income is under $38,750.  In short, this means those in the highest bracket will be taxed at a lower rate, and people who will fall into the lower brackets will experience the same.  While that’s great news for those who fall into the far ends of the brackets, if you fall into the middle section you may experience the opposite effect.  For example, a single filer whose taxable income was $200k last year paid tax at 33%; a single filer at that same income level would pay 35% this year.  This is the impact that will be felt by most upper middle-income households with income that is reported on a W-2.  This impact is expected to be felt by single filers with income over ~$92K, and married filers with income over ~$158K.  If your household income exceeds these number you will experience a significant tax increase this year.

Here is a side by side comparison of the old brackets in 2017 compared to the new brackets for 2018.  For simplicity we’ve limited this review to single filers.  The trend seen in single filers applies to all taxpayers. Use these tables to find where you are, and what bracket you will fall in for each year.

tax braket comparison

If you find you’re in a higher bracket, you’ll need to take actions to improve your tax position. Even if you find yourself in a lower bracket, be mindful that this is just the first of many ways the tax reforms will impact you.  Therefore, we’re providing action items that you can employ to improve your tax position.

Bear in mind, your tax bracket is based on your taxable income. The lower your taxable income, the lower bracket you’ll fall into.  Now, you certainly don’t want to take a pay cut just to fall into a lower tax bracket, but you can lower your taxable income without changing your actual income.  The way to do so is to maximize your pre-tax contributions.

Here are the top 5 pre-tax contributions that nearly every taxpayer can use to their advantage:

  1. Retirement Savings: Pre-tax contributions to an employer-sponsored retirement plan such as a 401(k) or 403(b).
  2. Medical Expenses: Pre-tax contributions to a flexible spending account (FSA) can be used to cover out-of-pocket medical expenses including co-pays, deductibles, prescriptions and OTC drugs.
  3. Childcare Expenses: Pre-tax payroll deductions can be used to fund a dependent-care account to cover childcare costs.
  4. Insurance Expenses: Pre-tax deductions can be used to cover group health insurance premiums. If you purchase life insurance through your employer, those premiums are also taken from your paycheck before tax.
  5. Charitable contributions: You can also contribute to many 501(c)3 charities on a pre-tax basis.

Contact your employer to incorporate these pre-tax contributions that serve to improve your overall tax position. These changes alone will be helpful to all taxpayers.  Then, when you’re ready to add in more layers to a tax savings strategy, contact us.  We can help to ensure you pay less tax in 2018 than you have any year prior.

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