Regardless of your politics, San Rafael residents will experience a significant change in how their taxes will be processed following the massive tax bill signed into law by the President just before Christmas. Even professionals such as myself are still just beginning to fully grasp the magnitude of this change. It’s a lot to process, and unfortunately the bill was drafted rather hastily, so proper analysis takes time.
Understanding the New 2018 Tax Laws
However, there are many facets of it that offer concrete information. That comes coupled with the fact that a lot of rumors and discarded elements from previous drafts circulated, and because of the brevity of the final bill’s review period, it was hard to immediately discern fact from fiction. With that in mind, here are seven key facts you should know as you head into 2018’s tax season.
Fact #1: The Standard Deduction Has Increased
A large amount of people may choose to avoid itemized deductions in 2018. Why is that? Simple; the standard deduction has increased, making it more valuable for individuals and married couples to take over itemized Schedule A deductions. The changes are as follows:
- Individuals and separate filing: $6,350 to $12,000
- Heads of household: $9,350 to $18,000
- Married couples filing jointly: $12,700 to $24,000
How much of an impact this has remains to be seen. The argument made by the GOP is that any losses in itemized deductions (see below) will be offset by the increase in standard deductions for a simpler process. Only time will tell if that is true.
Fact #2: Self-Employed People Can Still Deduct Expenses
One of the biggest rumors surrounding the bill was that self-employed people would no longer be able to write off business expenses. This confusion stemmed from some unclear verbiage in earlier drafts that restricted write offs for small businesses.
The good news is that in the final bill, self-employed people can still write off their expenses. Here’s the previous passage that proved to be confusing:
“The proposal repeals all miscellaneous itemized deductions that are subject to the two percent floor under present law.”
The final version explicitly notes that this is for employees regarding non-business expenses. This applies to, say, employees and their union fees, but not to self-employed people and their business-related expenses. What does that mean for self-employed people? Fortunately, not much is going to change, at least in that regard. As long as you continue to keep your receipts and make a detailed log of transactions, deductions should continue to go as planned. There will be other changes on your return for better and for worse but the specifics of this section functionally remain the same.
Fact #3: A Cap on Writing Off Various Taxes Issued by Local Bodies
One rumor that is absolutely true is the $10,000 cap on write-offs for cumulative taxes paid to local bodies. For most people, this means two sources combining towards the cap: property tax (paid towards counties) and state and local taxes. To see if you paid more than $10,000 last year, pull out Schedule A from your 1040 form. Lines 5 and 6 are for state and real estate taxes; this is what most people will look for. Lines 7 and 8 also provide other potentially related taxes but they’re not as common. For many of the homeowners in Marin County where I’m based, the high cost of housing means they will likely be impacted by this.
You may have heard about people paying their final 2017-18 installment before the turn of the calendar year to take advantage of 2017 laws. This didn’t necessarily apply in all situations, so before you pay yourself on the back, look deeper and see if it definitely applies to you. The short version is that if you received a statement issued before 2017 ended, then you should be eligible for this move. Check with your local municipalities to confirm. The Tax Act specifically prohibits an itemized deduction in 2017 for a prepayment of 2018 state or local income taxes.
Fact #4: Buying and Selling a Home Maybe Less Affordable
If you’re staying in the home you purchased over the long haul, then the deduction on your mortgage interest doesn’t change. However, if you’re buying a home between December 16, 2017 and the end of 2025, there’s a new cap on total mortgage interest deductions. The cap is on interest paid for married couples up to $750,000 or single people up to $350,000 — compared to $1 million and $500,000 respectively under the previous law.
This will impact home buying in expensive markets while not touching a good portion of the country. Some predict that this will cause home prices to fall in those markets, thus opening the door to making housing a little more affordable. It’s hard to say if that’s true, as many other variables will affect the eventual outcome in each individual market. However, for my neighbors in San Rafael and all around the Bay Area, you’ll most likely be affected.
Fact #5: College Funds Aren’t Just for College Anymore
529(c) savings accounts have been available for families saving for eventual college tuition for decades. Starting in 2018, there will be a major change to this, as it can now be applied to K-12 education. Since public schools don’t incur significant expenses outside of practical things (backpacks, binders, etc.), this is a move that clearly targets taxpayers spending on private school tuition. This shouldn’t be a big surprise given the GOP’s support of privatized education, though it provides flexibility for making private and charter schools more affordable.
Fact #6: Tax Brackets Will Change
Tax brackets change every year, but this year will see a significant shift in brackets and rates. Studies have shown that the biggest savings will be in high tax brackets, with middle income seeing a small savings and lower income seeing virtually the same bill. There is a philosophical divide between left and right as to whether trickle-down or ground-up economics drive job growth and spending, but that debate is for a different time and place. Functionally, my job is to just give you the facts and help you prepare for the reality of it all. With that in mind, the following tables will be helpful in projecting your experience for 2018 and beyond:
Fact #7: The Affordable Care Act
One of the biggest talking points of the tax bill was the way it removed the penalty for not having health insurance. This remains in place for 2018 but will be removed starting in 2019. There is plenty of philosophical debate about the pros and cons of this, but as with the bracket info above, my job is to give you facts. Thus, come 2019, you can choose to be without coverage without penalty.
San Rafael Info on The New Tax Law
The ripple effect of the new tax law is overwhelming, and if you need help deciphering it, you’re not alone. Come by my San Rafael office for a free consultation and we’ll determine the impact of the new law on your taxes.
- Preparing Your Tax Documents - February 1, 2024
- Making of a Successful Team Environment - December 31, 2023
- Got a Mistake on Your Tax Returns? - September 3, 2023