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Dollars & Sense: Know Your Tax Facts

By Roberta L. Nestor

Yes!  It is officially tax season and millions of American’s are scrambling to get all of their tax documents ready for their tax preparers.  In December of 2017, Congress passed the Tax Cuts & Jobs Act (TCJA) which represents the first major tax law overhaul since the Tax Reform Act of 1986.  Certainly, the TCJA effects each of us in different ways.  Let’s face it, there are no two tax returns that are identical.  Who benefits from the new tax bill?  It’s hard to say.

The standard deduction has increased significantly, from $6500 to $12,000 for single filers; from $9,550 to $18,000 for head of household filers; and from $13,000 to $24,000 for married taxpayers who file joint returns.  For most, this means you might not be itemizing your deductions any longer.  The itemized deductions that remain available might not amount to more than the standard deduction you are entitled to.  On the other hand, there are those taxpayers whose total itemized deductions will exceed the new standard deduction.  If that is you, you might be among the many taxpayers who are actually hurt by the new tax bill.

Here are a few check-points to see if itemizing may still work for you:

  • How much is your home mortgage? The mortgage interest itemized deduction is now capped at $750,000 instead of $1ml.  Unless you have a very expensive home, this shouldn’t affect you.
  • Are you deducting the interest on a refinance loan (Home Equity Line of Credit)? The home interest mortgage deduction says you will no longer be able to claim the interest on refinanced loans as a tax deduction unless you use it to “buy, build or substantially improve” a home.  That means that if you use your home equity line of credit to pay for things like your child’s education or a new car, then the interest will not be tax deductible.
  • Have you been deducting state and local taxes? The total amount you can deduct for all state and local taxes (including sales, income and property taxes) is limited to $10,000.  If you have been paying and deducting more than $10,000 in the past, you will be on the wrong side of the new bill.
  • Do you have medical bills? The new bill has dropped the hurdle so that out of pocket, uncovered medical expenses now only have to exceed 7.50% of your adjusted gross income, instead of the 10% in prior years.  However, this provision will sunset back to 10% after the 2019 tax year.
  • Do you pay alimony? This change is effective for divorce agreements entered into after 12/31/2018.  Now, not only do you have to pay your ex, but you also have to pay taxes on that portion of your income.  As for the ex-spouse, who is receiving alimony – now they will receive it tax-free.

Perhaps the most affected by the new tax bill will be families.  TCJA eliminates the personal exemption or being able to claim dependents.  Personal exemptions are dollar amounts that taxpayers could deduct from their taxable incomes for themselves and for each of their dependents.  In 2017 this was $4,050 per person.  It is projected that single taxpayers with no children will probably still come out a little ahead, even after this change as the increase in the standard deduction more than makes up for the $4,050 exemption.

What happens to a married couple with three children?  That is a total of five exemptions that they would have been able to claim on a joint return in 2017.  Under the new law you will now have to pay taxes on $20,250 of income that you did not in 2017.  Because of this it is unlikely that large families will come out ahead, even with the increased standard deduction.

The good news is that the new tax bill is not forever.  Most all of the provisions are scheduled to “sunset” or expire on 12/31/2025 unless Congress renews or haggles out another bill in the interim.  In the meantime, take time with your tax preparer to understand how your tax situation has changed, why it has changed, and what adjustments, if any, you should be making.

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue, in Milford, CT offering retirement, long term care, investment and tax planning services.  She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  She can be reached at 203-876-8066 or roberta@nestorfinancial.com.  This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, and/or a lawyer.

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