With the close of tax filing season for 2017, now is a good time to consider the 2018 tax year. The most sweeping tax reform package in decades took effect on January 1, 2018. You should notice the impact of the changes in your 2018 paychecks soon.
Although a number of changes for retirement savings programs were considered, in its final form the legislation preserved key retirement savings incentives. As a result, the changes don’t materially affect your UC retirement savings plans.
But the rules have changed for income taxes, deductions, college savings, and more. Here’s an overview of the biggest changes to be aware of.
The new law makes no changes to the amount you can contribute to your UC 403(b), 457(b), or DC Plan accounts, and it leaves the favorable tax treatment for these plans intact. Likewise, hardship withdrawal provisions and tax rates on early withdrawals remain unchanged. The law also left the rules for health savings accounts intact.
The new tax code reduced several of the marginal income tax rates (see chart). Those new tax brackets and the other changes to the individual tax code are all temporary—Congress will need to act or the rules will revert to 2017 law after December 31, 2025.
Tax reform combines the personal exemption and standard deduction into a single higher standard deduction, which is indexed to inflation. The child tax credit increased and there is a new dependent tax credit. The higher standard deduction for people age 65 and older still exists. The new provisions expire for taxable years after December 31, 2025, and the rules return to 2017 tax law.
The new law changes the balance between itemized and standard deductions. Higher standard deductions mean it will make sense for fewer people to itemize deductions—so charitable gifts, medical expenses, home mortgage interest, and other itemized deductions all face a higher threshold before they become useful.
In addition, the new law directly changes or limits a large number of deductions and credits. Here is a look at how a few of the most popular deductions changed:
The law roughly doubles the federal estate tax exemption to $11 million per person ($22 million per couple). This change will help some families avoid this tax at the federal level. That limit is indexed to inflation, but will expire and revert back to 2017 law after 2025.
The AMT was designed to prevent high-income individuals from avoiding income tax by piling up deductions. It is essentially a parallel method for calculating your income tax liability.
The tax reform law makes changes designed to limit the impact of the tax. The law raises the minimum income level at which the AMT applies, from $50,600 to $70,300 for individuals and from $78,750 to $109,400 for couples married filing jointly.
Corporate tax rates dropped to 21% beginning in 2018. That tax cut is not scheduled to expire.
Pass-through businesses, businesses structured as sole proprietorships, partnerships, and S-corporations are taxed at individual tax rates, but are able to deduct 20% of income. To prevent high-income individuals from taking advantage of this deduction, it is only available to couples filing jointly with incomes below $315,000. For income above that level, the rules are complex, but it appears that certain kinds of businesses might still be eligible for a partial deduction.
The plan lets businesses fully expense new equipment right away, but the provision will eventually expire.
The tax legislation allows up to $10,000 per year in 529 savings plan assets to be used for education expenses for grades K–12, in addition to college and post-graduate study. It also temporarily increases the contribution limits to ABLE accounts under certain circumstances.
In light of the new legislation, here are a few things you may want to consider and consult with a tax professional about.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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