Tax reform: 12 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 take effect January 1, 2018. And remember: Tax reform is complicated. Work with financial professionals you trust to help you sort out the impact to your own bottom line.

1. Changes in retirement savings

Under the bill, if 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.

If you ever take a loan from your 401(k) account, the tax bill also gives you more time to repay that loan if you leave your employer.

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

The bill keeps 7 tax brackets, but changes the rates and income that apply to those brackets. The new rates are: 10%, 12%, 22%, 24%, 32%, 35% and 37%, and are effective January 1, 2018. They expire after 2025. Contact your financial or tax professional to ask about your rate.

3. Nearly doubles the standard deduction

The bill 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.

It’s expected the number of filers who choose to itemize would drop dramatically since the only reason to do so is if your deductions are higher than the “new” standard deduction.

4. Eliminates personal exemptions

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.

5. Caps state and local tax deductions

A $10,000 maximum deduction—regardless of filing status—can be taken on any combination of state and local income, sales, or property taxes.

6. Lowers the limit on mortgage interest deduction

The bill includes 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 if you take out a new loan for a first or second home. (If you already have a mortgage, you’re not affected.)

A related change is that there is no longer a deduction for interest on a home equity loan.

7. Maintains exclusion for sale of primary residence home

If you’re selling 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.

8. Reduces medical expense deduction

You can take a deduction for 2017 and 2018 if your medical expenses were more than 7.5% of your adjusted gross income.

9. Expands child tax credit

The credit doubles to $2,000 per child until age 17. The bill also raises the income threshold for claiming full credit to $200,000 for single parents and $400,000 for married couples.  For lower income taxpayers, up to $1,400 of this credit is refundable per child.

You can take a $500 credit if you support a dependent who is not a child—for example, a child 17 or older, an elderly parent who is ill or an adult child with a disability.

10. Reduces who’s hit by AMT

The final bill kept the Alternative Minimum Tax (AMT), but reduces the number of people who would be hit by it by raising the income exemptions to $70,300 for single or head of household, and $109,400 for married filing jointly or widow(er).

11. 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.

12. Eliminates the mandate to buy health insurance

There will no longer be a penalty if you don’t buy health insurance. This is expected to save money because the government won’t have to spend as much on insurance subsidies and Medicaid.

What you can do now

  • Visit the Tax Foundation or the Tax Policy Center, both useful sources to help you get the full picture.
  • Find out how changes to state and local taxes could impact you based on where you live.
  • Contact your financial or tax professional to ask about how the tax bill affects you or your business.

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.

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