Another year has ended and tax season is almost upon us! While little has changed relating to 2017, a new set of tax laws are in effect starting with the 2018 tax year. The new law dictates that most features relating to individual 1040 taxes will expire at the end of 2025 unless future action is taken. With so much noise and confusion over the new tax provisions, hopefully I can broaden your understanding of those items which affect most middle class seniors. This is not intended to be a comprehensive review of the new tax laws for the general public or businesses.
Anne Mettler, CPA
This article focuses on those having "taxable income" up to about $150,000 for married filing jointly and $90,000 for singles, and no other dependents.
Revised Tax Brackets
The biggest news with the new tax law is the change to tax brackets. The numbers in the chart are based on what the IRS calls "taxable income", which is line 43 of your 2016 Form 1040 and represents adjusted gross taxable income less deductions.
Another significant change in the 2018 tax reform is an increase to the standard deduction. For married filing jointly, the standard deduction has increased from $12,700 to $24,000 and for single filers it has changed from $6,350 to $12,000. Those who do not currently itemize will benefit significantly (only about 30% of taxpayers itemize). Those who do itemize will not be harmed. Remember, if you have more deductions to claim than the standard, you can still claim those that exceed the standard, but you automatically get the entire standard deduction. The additional deduction in current tax law for those who are blind or over 65 still applies, so a married couple with both people over 65 or blind will get an additional deduction of $2600 ($1300 each) or $1600 for a single person, which are the same as 2017 limits adjusted for inflation.
The new tax law eliminates the personal exemption, which is a deduction you get per person listed as a dependent on your tax return. This deduction amount was previously $4050 per person, so the change to the standard deduction more than covers this loss for both singles and married couples who have no other dependents and who did not previously itemize or had minimal itemized deductions.
Long-Term Capital Gains and Qualified Dividend Rates
Interestingly, Congress kept the long-term capital gains and qualified dividend rates unchanged, although the dollar amounts they apply to have changed with inflation. These long-term capital gains brackets do not exactly line up with the new tax brackets, which seems like it might be an unintended outcome of the new tax law. The way it is written now, investors may pay more tax on a few hundred dollars of tax-favored income in 2018 than they pay on ordinary income. Hopefully it will be corrected as soon as someone figures this out.
All indexing done on tax brackets and limits will be done using a revised method called chain-weighted CPI-U rather than the currently used consumer price index for all urban consumers (CPI-U). The chain-weighted value assumes the consumer will switch to more cost-effective options when the price of a product goes up. This means that the tax brackets and other indexed numbers within the tax code will not keep up with inflation. This change does not expire as is the case with most other features of tax reform tied to individuals.
The new tax laws appear to be beneficial to seniors in the short-term, but perhaps less so in the long-term with the change to the chain-weighted CPI-U method of indexing. Not having to itemize deductions will also simplify the life of seniors, as many are not fully aware of what is legally deductible. If you need help with tax preparation this year, please give me a call at 509-879-7187 or email Anne@MettlerCPA.com. I am available Monday through Friday, most Saturdays, and many evenings during tax season. I come to you at your home or office, so you don't even need to get out in the bad weather!
24 After Jesus and his disciples arrived in Capernaum, the collectors of the two-drachma temple tax came to Peter and asked, “Doesn’t your teacher pay the temple tax?” 25 “Yes, he does,” he replied. When Peter came into the house, Jesus was the first to speak. “What do you think, Simon?” he asked. “From whom do the kings of the earth collect duty and taxes—from their own children or from others?” 26 “From others,” Peter answered.
“Then the children are exempt,” Jesus said to him. 27 “But so that we may not cause offense, go to the lake and throw out your line. Take the first fish you catch; open its mouth and you will find a four-drachma coin. Take it and give it to them for my tax and yours.” Matthew 17:24-27 (NIV)
Please Note: All information provided in this newsletter is general in nature, does not cover all intricacies of the law and does not constitute financial advice regarding any specific situation. Individuals or entities obtaining information from this newsletter should not act on it without first obtaining professional advice as the law relates to their particular set of facts.
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