Tax reform: 13 things investors should know right now

Photo of a man who learned how tax reform will affect him.

Here’s a quick snapshot of some of the changes that took effect Jan. 1, 2018. In short, it’s complicated. Work with financial and tax professionals you trust to help you sort out the impact to your own bottom line.

1. Changes in retirement savings

Should you have a traditional Individual Retirement Account (IRA), you’re allowed to convert it to a Roth IRA. However, you can no longer convert a Roth IRA to a traditional IRA. 

When you’ve taken a loan from your 401(k) account, you’ll have more time to repay that loan if you leave your employer, which helps to avoid potential early withdrawal penalties or income recognition, depending on your age at the time.   

2. Lower individual tax rates (for many, not all)

The Act keeps 7 tax brackets, but changes the rates and income that apply to those brackets, effective Jan. 1, 2018. They expire after 2025. 

2018 Federal individual income tax brackets and rates

The top federal individual marginal rate is 37% under the new law.

Income tax rates1, 2Single3
10%$0 to $9,52510% of the taxable income
12%$9,526 to $38,700$952.50 plus 12% of the excess over $9,525
22%$38,701 to $82,500$4,453.50 plus 22% of the excess over $38,700
24%$82,501 to $157,500$14,089.50 plus 24% of the excess over $82,500
32%$157,501 to $200,000$32,089.50 plus 32% of the excess over $157,500
35%$200,001 to $500,000$45,689.50 plus 35% of the excess over $200,000
37%Over $500,000$150,689.50 plus 37% of the excess over $500,000

Income tax rates1, 2Married filing jointly
10%$0 to $19,05010% of the taxable income
12%$19,051 to $77,400$1,905 plus 12% of the excess over $19,050
22%$77,401 to $165,000$8,907 plus 22% of the excess over $77,400
24%$165,001 to $315,000$28,179 plus 24% of the excess over $165,000
32%$315,001 to $400,000$64,179 plus 32% of the excess over $315,000
35%$400,001 to $600,000$91,379 plus 35% of the excess over $400,000
37%Over $600,000$161,379 plus 37% of the excess over $600,000

3. More money in your paycheck?

The IRS released updates to 2018 income-tax withholding tables on Jan. 11 that reflect changes. Employers will start using the new rates as soon as possible, but no later than Feb. 15, 2018.

That means, come February, you could see an increase in your paycheck. How quickly it happens depends on when your company starts using the new rates, and whether you’re paid monthly, bi-weekly or weekly.

Should you be curious about the long-term impact of putting that “extra money” toward your retirement savings, here’s an easy way to find out. Enter 3 numbers into our Retirement Wellness Planner and you’ll get a score that lets you know how you’re doing toward your retirement savings goals. Then you can make a simple adjustment to see the potential long-term impact of contributing just 1% more from your paycheck.

4. Standard deduction nearly doubles

The Act nearly doubled the standard deduction from $6,350 to $12,000 for single filers, from $9,350 to $18,000 for head-of-household filers, and from $12,700 to $24,000 for married couples filing jointly. Standard deductions for people age 65 and older and those who are blind are even higher, as they are today.

5. Personal exemptions eliminated

Until now, you could claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. Basically, it lowered your taxable income. That exemption was eliminated in the new tax bill in favor of increasing the standard deduction.

6. Caps state and local tax deductions

Assuming you itemize deductions, you can take a $10,000 maximum deduction ($5,000 if Married Filing Separately or MFS) on any combination of state and local income, real estate, and personal property taxes. Alternatively, you may elect to substitute state and local sales taxes for income taxes, but you can’t use both.

7. Lowers the limit on mortgage interest deduction

The Act sets a cap on the total amount of mortgage debt for which you can deduct mortgage interest paid – with a total amount of the mortgage up to $750,000 ($375,000 if MFS) if you take out a new loan for a first or second home between Dec. 15, 2017, and Dec. 31, 2025. After this time, the cap will revert to total mortgage indebtedness of $1,000,000 ($500,000 if MFS). Should you already have a mortgage, your debt is grandfathered and you can refinance without losing the $1,000,000 cap as long as you don’t increase the debt by refinancing. However, if you have a grandfathered mortgage and acquire a second home, the new cap will apply to limit the second home mortgage to the $750,000, less the grandfathered mortgage up to $750,000.

Interest from home equity loans is no longer deductible, regardless of when the indebtedness was incurred. 

8. Maintains exclusion for sale of your primary home

Should you decide to sell your primary residence, and you’ve lived there for 2 of the last 5 years, single filers can still exclude up to $250,000 (married couples up to $500,000) from capital gains taxes. Wondering what that is? It’s a tax levied on profits you make when you sell for a price higher than what you originally paid plus the cost of upgrades other than simple maintenance and repairs.

9. Reduces medical expense deduction

You can take a deduction for 2017 and 2018 if your qualified medical expenses were more than 7.5% of your adjusted gross income (AGI). Previously, it had to be 10% of your AGI.

10. Expands child tax credit (CTC)

The credit doubles to $2,000 per child until age 17. In other words, if you have 1 child, you’ll be able to claim a $2,000 tax credit. For 2 children, your tax credit is $4,000. For lower income taxpayers, up to $1,400 of this credit is refundable in cash per child. Also, the CTC will be available to more households now. You can claim the full CTC if your AGI is $200,000 or less for single parents, $400,000 AGI or less for married couples. 

Finally, you can take a $500 credit if you support a dependent who is not a child – for example, an elderly parent who depends on you for care, or an adult child with a disability.

11. Reduces who’s hit by AMT

The Act keeps the Alternative Minimum Tax (AMT), but reduces the number of people who will be impacted by raising the income exemptions to $70,300 for single or head of household, and $109,400 for married filing jointly or widow(er).

A little background: Because certain tax benefits can significantly reduce a taxpayer’s regular tax amount, the AMT was put into place to set a limit on those benefits to insure everyone pays taxes. Taxpayers calculate both regular taxes and the AMT and pay the greater of the 2.

12. Exempts nearly everybody from the estate tax

The amount of money exempt from the estate tax doubles to $10.98 million for married couples. Since only 0.2% of all estates are large enough to be hit by estate taxes, this only applies to a small number of people.

13. Eliminates the Affordable Care Act penalty for failure to buy health insurance

Although the penalty is still applicable for 2018, there is no longer a penalty if you don’t buy health insurance providing minimum essential coverage thereafter. 

What you can do now

If you want to read more about the Tax Cuts and Jobs Act, go to or the Joint Committee on Taxation. Contact your financial or tax professional to ask about how the tax bill affects you or your business.

1 Change will sunset after 2025 and revert to its 2017 numbers, adjusted for inflation.

2 These rates are imposed on taxable income, meaning income remaining after applicable exclusions, deductions and exemptions are claimed. Note that each rate applies only to income falling within that bracket.

3 Unmarried individuals who are not surviving spouses or heads of household.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

The Retirement Wellness Planner information and Retirement Wellness Score are limited only to the inputs and other financial assumptions and is not intended to be a financial plan or investment advice from any company of the Principal Financial Group® or plan sponsor. This calculator only provides education which may be helpful in making personal financial decisions. Responsibility for those decisions is assumed by the participant, not the plan sponsor and not by any member of Principal®.  Individual results will vary.  Participants should regularly review their savings progress and post-retirement needs.  

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