Wondering how the Tax Cuts and Jobs Act of 2017 (TCJA) will affect your taxes next year? The tax law will affect families in a myriad of ways. While there were a variety of changes made that affect everyone, this post will focus on the ones that are most impactful to families with kids. Keep in mind that many of these provisions are set to expire in 2025, but this will at least give you something think about as you move through 2018.

Tax Rates Were Reduced

Tax rates were reduced for all brackets except for the lowest bracket, which remains at 10% of taxable income. There was some shifting of brackets but for most dual-income households your highest tax-rate has been reduced. There is a strange anomaly for married-filing-jointly households earning between $400,000 and $416,700 – their tax rate will actually increase.  If that applies to you then take some unpaid leave or get a raise and get yourself out of that donut hole!

Loss of Personal Exemptions

Gone [This hurts, especially for larger families]. Each family used to be able to take a $4,150 exemption for each child under age 19 (or up to age 24 if that child is in college). As you can imagine, personal exemptions were very popular with tax payers. Lawmakers tried to offset this change by increasing the standard deduction and lowering overall tax rates.

Child Tax Credit was Doubled

In 2017 the child tax credit was worth $1,000 and was phased out fairly quickly, starting at $110,000 in income for married couples filing jointly. Under the TCJA the child tax credit is now worth $2,000 and the phase-out was increased to $400,000 for married filing jointly (and $200,000 for those who file as single).  This is just for children age 17 and younger at the end of the tax year. The refundable portion of this credit is up to $1,400.

Increase in Standard Deduction

The standard deduction for single filers was increased from $6,000 to $12,000 and the standard deduction for those who files married filing jointly was doubled from $12,000 to $24,000. This means that far fewer families will be itemizing. However, certain caps may affect higher income families more than others.

State and Local taxes (SALT) deductions are capped at $10k

At first this may seem like someone else’s problem, but let’s run through it real quick. Let’s say you have to pay VA state income taxes on $150,000 of income, which works out to about $8,368, and you live in a moderately affluent neighborhood so you owe $3,500 annually in real estate taxes. Your SALT taxes equal $11,867 ($8,368 + $3,500) but now you can only deduct $10,000.

Well that escalated quickly.

Cap on Mortgage Interest and HELOC interest

Mortgage interest incurred on a loan used to purchase or substantially improve a home is still deductible on amounts up to $750,000. Under the old tax law, interest on home loan balances up to $1,000,000 was deductible. Existing mortgages (prior to 1/1/2018) were grandfathered in under the old, higher limit.

Under the old law, HELOC interest on up to $100,000 of debt used for anything (i.e. college, debt consolidation, etc.) was deductible. Now that is no longer the case. HELOC interest is only deductible to the extent that it is used to substantially improve or purchase a home. It is subject to the same $750,000 cap as traditional mortgages. Note that this is on total debt for the taxpayer (single and married filing-jointly) not per residence..

Miscellaneous Itemized Deductions Were Eliminated

First, these were subject to a threshold of 2% of Adjusted Gross Income, so most high income families weren’t taking advantage of this deduction too often. However, investment management fees, tax preparation costs, and unreimbursed employee expenses all fell into this category.

529 Funds OK’d for K-12 Private School Tuition

Under the TCJA you can now use 529 funds for K-12 private school tuition (up to $10,000/year per student).  It’s important to note that 529s are administered by the states, so it was up to the states to implement this change. Some states have not made this change, so don’t pull money out of your plan until you are confident you state has adopted these changes. Fortunately for VA residents, the VA 529 College Savings Plan has made this change.

*** Important Financial Responsibility Disclaimer***

I am not at all advocating that you pull money from a 529 college savings account to pay for private school K-12 tuition costs. This only makes sense in a handful of situations, i.e.  if you can contribute money to your 529 account, get a tax deduction and then use the money to pay your private school tuition costs. Or if you receive money or an inheritance that is earmarked for private school and you want to allow it to grow tax free for a period of time before using it (watch the risk in your portfolio).

Raiding your kid’s college savings account to pay for private K-12 education is very (very, very, very) frequently a bad idea.

(Want more info? Watch this video I made on Using the VA529 to Pay for Private School)

Moving Expenses No Longer Deductible

Moving up the corporate ladder that requires you to move your family? Your moving expenses used to be tax-deductible (if you met certain provisions). Under TCJA only military members moving on military orders may take this deduction. So if you are moving for a job, consider asking your new employer to cover your moving expenses during your negotiations.

You are negotiating your jobs offers, right?

Whew. That’s enough about taxes for one day. What questions or comments do you have for me? Do you think you will fare better or worse under the new tax law provisions? Were you surprised by any of the changes? Comment below!

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