This year we saw strong stock market returns, particularly for growth stocks. One of the reasons for the strong move upward was the passage of the Tax Cuts and Jobs Act of 2017 (TCJA). Anticipation of a tax deal dominated the second half of the year. Part of last year’s appreciation may reflect the fact that reduced corporate taxes may add 6-8% to corporate earnings. Initial analysis of the new law has focused on blue states and red states and state and local tax (SALT) deductions. While deeper analysis shows a more complex new chapter for the IRS. We have decided to recap some of the more important features.
Standard Deduction and Exemptions
The standard deduction was expanded to $24,000 for married couples and $12,000 for individuals, compared to $12,700 and $6,350 in 2017. Unfortunately, personal exemptions of $4,050 were eliminated. Whether or not this impacts you depends upon if you itemize your deductions. Families with children that do not have itemized deductions will see a reduction. For example, a family of 5 had a total of $32,950 in these deductions (5 x $4,050 plus $12,700) in 2017. That will be $24,000 in 2018.
The deduction for state and local taxes, both income and property, was very controversial and has been capped at $10,000. This could have a large effect on residents of a number of high tax states. One thing to note is for those subject to the AMT, these deductions may have already been significantly reduced in your prior year returns.
Mortgages and Home Equity Loans
The tax code retains the deductibility for mortgage interest for current loans without change. For mortgage interest on new loans deductions are up to $750,000 of debt principal. Deductions for home equity loan interest has been eliminated except if the loan was acquired to improve your primary residence.
Offsetting all of potential increases above is a reduction in tax liability resulting from a change in the brackets. For married couples, almost all of the changes in the brackets will result in a reduction in taxes, particularly couples making $150,000 and above. Notably, the marriage penalty was eliminated for all income levels up to $600,000 per couple by making all of these brackets essentially double the individual bracket. Individuals making between $157,000 and $165,000 and those between $200,000 and $425,000, will see increase from the change in brackets, while all other income ranges will see a reduction.
Obviously, this is just a primer that touches just a small part of the TCJA’s changes to the tax code. For many tax filers, most of the changes to the tax code are offsetting. Whether your taxes are going to go up by a little or down by a bit is difficult to predict without running the numbers.