The Tax Cut and Jobs Act was signed into law at the end of 2017. This is the first overhaul of the tax code in more than 30 years! The changes made will affect people in all walks of life—from those saving for kids’ college expenses to retirees and seniors. As 2018 comes to an end, we thought we’d provide a refresher on a few of the changes likely to affect large groups of people.
Did you know that medical costs are sometimes tax deductible? Before the new law, medical expenses that exceeded 10% of a person’s income could be deducted. For 2017 and 2018, medical expenses that exceed 7.5% of a person’s income can be deducted. For example, if a couple earning $50,000 per year incurs medical bills of $10,000 in a given year, the couple could deduct $6,250 on their federal tax return. In 2019, the threshold returns to 10%.
Retirees may have concerns about how tax reform will affect Social Security. The new law does not, in fact, affect how Social Security and investment income are taxed. Income tax rates have been adjusted, with brackets beginning at 10% and the highest topping out at 37%. Additionally, the blind and elderly deductions will remain under the new law. Single filers age 65 and above can claim $1550. Married couples filing jointly can claim $2500 if they both meet the requirement or $1250 if only one meets the requirement.
Many people utilize 529 college savings plans to set aside funds to be used for their children’s or loved one’s education expenses. 529 plans are appealing because they provide tax advantages at the federal and, in some cases, state levels. These plans were originally created as a way to save for higher education only. However, the new tax plan expands approved uses for money saved in these plans. Going forward, 529 plan dollars may be put toward elementary and secondary school expenses, certain home schooling expenses, and educational therapies for children with disabilities.
Estate Tax Exemption Amount
While our great state repealed its inheritance tax a few years ago, the federal estate tax has continued to affect a relatively small percentage of individuals and couples in the United States. The new law shrinks the number of people affected even more. For decedents dying in 2019, the estate tax exemption will be $11.4 million per person. The high net worth folks who are affected by the tax will be taxed at a rate of 40% on all assets that exceed the exemption. It’s important to note that these higher exemption levels will only last until 2025, at which time Congress would have to renew this law or pass a different law to maintain these levels.
This is not an exhaustive list of changes made to tax law. Consult with your tax preparer to find out the best tax filing strategy for you.