Reforms in the Tax Cuts and Jobs Act begin in 2018 and affect virtually every U.S. taxpayer. Find out which changes shake up your personal finances the most so you can prepare, avoid potential pitfalls, and keep your tax liability as low as possible.
5. State and local tax breaks are limited.
Before the Tax Cuts and Jobs Act, you could include an unlimited amount of property tax and state or local income tax as an itemized deduction. (There are only seven U.S. states that don’t impose a state income tax in addition to federal tax.)
Now, you can only claim up to $10,000, or $5,000 if you’re married filing separately, for all types of state and local taxes. This cap is a huge blow if you live in a high-tax state like California or New York, where your property taxes alone could easily exceed $10,000.
6. Education incentives are modified.
It’s a mixed bag with education benefits because some stay the same, some improve, and others are reduced. But overall, there isn’t much to complain about and I’ll give you the highlights.
Starting in 2018, up to $10,000 of your 529 funds can be used for tuition at any public or private school, per student.
One new benefit is that 529 college savings plans can now be used for elementary or secondary school expenses, in addition to the costs of higher education. Starting in 2018, up to $10,000 of your 529 funds can be used for tuition at any public or private school, per student.
This expanded used of 529 funds is meant to replace Coverdell savings accounts after 2017. If you have a Coverdell, you can spend the funds, but you can’t make new contributions. You can even rollover a Coverdell to a 529 plan, if you want to consolidate your education savings.
There were rumblings that the student loan interest deduction would disappear, but fortunately that didn’t happen. You can still claim up to $2,500 per year of interest paid on student loans, if you don’t exceed annual income limits.
See also: How to Get Out of Debt Fast
7. Healthcare mandate penalty is eliminated.
Healthcare got thrown into the tax bag because the Affordable Care Act, known as Obamacare, charged a tax penalty if you didn’t have coverage for more than 60 consecutive days. Interestingly, the new tax law doesn’t repeal the Obamacare mandate, but it does reduce the penalty to zero, starting in 2019. So, you could owe a penalty if you didn’t have coverage in 2017 or 2018.
This change is a bit confusing because it means that you’re really supposed to have health insurance, but if you don’t, the administration is going to look the other way after 2019. You might consider that a win if you plan to skip health insurance, which I don’t recommend because medical debt is a leading cause of bankruptcy.
Interestingly, the new tax law doesn’t repeal the Obamacare mandate, but it does reduce the penalty to zero, starting in 2019.
Problem is, health premiums are predicted to rise by about 10% due to fewer healthy people buying coverage once the tax penalty is lifted. If health insurers pay out more in claims than they make in premiums, they’re forced to raise rates for all policyholders or decide not to do business in certain cities, counties, or states.
Another medical issue that the Tax Cuts and Jobs Act changes is the threshold for itemizing medical deductions. Previously, you could claim medical expenses that exceed 7.5% of your adjusted gross income. But starting in 2019, they must exceed 10%, which cuts your allowable deduction.
More Tax Deductions Affected by Tax Reform Legislation
I mentioned that for many people, taking the standard deduction (instead of itemizing) may be more attractive because it will be higher starting in 2018. Another reason is that many itemized deductions have been eliminated.
Expenses for the following are no longer allowable tax deductions:
- Employee business expenses
- Tax preparation fees
- Personal casualty and theft losses (except for certain losses in federally declared disaster areas)
- Alimony payments (starting in 2019)
- Moving expenses (except for the military)
Here are some deductions you might be glad to know haven’t changed substantially or at all:
- Health savings account (HSA) contributions
- 401k retirement plan contributions
- Traditional IRA contributions
- Charitable donations
The tax reform changes I’ve mentioned here are not a complete list, but are likely to have the biggest effect on your wallet. The Tax Cuts and Jobs Act is effective through the end of 2025—so, in eight years, we’ll probably see another tax overhaul.
But for now, it’s wise to consult with a tax professional to make the most of your situation. A tax accountant or CPA can help you complete your W-4 correctly and make sure that your payroll withholding or estimated payments won’t leave you owing more.
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