Contrary to popular belief, tax policy doesn’t just apply to affluent, older taxpayers. Everyone, regardless of age, will be affected by Congress’ proposed tax changes in the Tax Cuts and Jobs Act of 2017. While articles and blogs tend to focus on the implications for wealthy baby boomers, this blog post will objectively highlight the impact for younger generations, like myself.
The Tax Cuts and Jobs Act calls for fundamental changes to the individual tax brackets, which are used to determine your income tax liability. Current tax brackets change from 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These modifications mean most individuals will see a decrease in their income tax rates while others (primarily low-income earners) may see no tax changes at all.
Standard deductions and personal exemptions will also change under the proposed bill. These are reductions to your income that that aim to reduce tax liability. The personal exemption, which for 2017, equates to $4,050 per taxpayer, will be eliminated. Instead, it will be consolidated into a larger standard deduction – $12,000 for individual filers and $24,000 for joint filers. Currently the standard deduction is set at $6,350 for individuals and $12,700 for married couples filing jointly. This means that single filers would see an increase in their total standard deduction of $1,600 ($12,000 – ($6,350 + $4,050)). Joint filers would see an increase of $3,200 ($24,000 – ($12,700 + ($4,050 x 2)).
I have some great news for you if you’re in grad school! Graduate tuition waivers, once up for taxation in the first draft of the tax bill, will remain untaxed in the final draft. This is a welcome relief for graduate students who utilize the waivers to help subsidize tuition costs while teaching courses or conducting research.
Employer-sponsored tuition assistance will also stay tax-free, up to $5,250 annually.
Education credits like the American Opportunity Credit and the Lifetime Learning Credit (both subject to income limits) will also remain available to taxpayers in the final draft. The AOC allows taxpayers to claim up to $2,500 annually for education expenses during the first four years of college, while the LLC allows up to $2,000 a year for continuing education expenses beyond the first four years of college. These tax breaks are excellent ways to help you pay for the cost of higher education. Just remember, you are only allowed to take one credit or the other. No double-dipping allowed!
Student loan interest deductibility will also stay in the tax code. This is the interest you pay during a given year on a qualified student loan. Currently, the IRS allows you to deduct up to $2,500 of interest paid annually. You claim this as an adjustment to income, so it’s not necessary to itemize in order to claim this expense. Another great perk to help manage the mounting debt that often comes with pursuing higher education.
And speaking of student loans, under the new tax bill, student loans discharged due to death or a permanent disability will no longer be considered taxable income.
The tax bill will also expand the usage of 529 plans. This state-sponsored investment vehicle was originally designed to encourage parents to save for their children’s college education exclusively. The expansion will now allow young families to use 529s to save for K-16 expenses, including homeschooling, up to $10,000 annually. With the new revision, families can start saving as soon as conception, as unborn babies will now be eligible for a 529 account.
The Work Opportunity Tax Credit stays in the revised bill. This is a credit that incentivizes employers to hire individuals from traditionally marginalized communities, including veterans, long-term unemployed, ex-felons, and summer youth employees.
The $250 tax break for teachers is also remains in the final bill. Currently, educators can deduct up to $250 for classroom materials paid for out-of-pocket. So, thank you to the teachers and all that you do! It’s not much, but this deduction will continue to be available to you.
Commuters will be affected by the new tax proposal, as transit and parking benefits provided by employers will be eliminated under the new bill. Current tax law allows for company reimbursement of parking and transit passes up to $255 month. The phaseout of this popular benefit is likely to be a negative for individuals who spend a significant portion of their incomes on public transportation. The bill also eliminates incentives that allow businesses to subsidize the expense of commuting by bicycle for their employees. However, tax credits for purchasing energy efficient vehicles remain intact.
Have a family or thinking about starting one? The child tax credit will increase from $1,000 per child to $2,000. Currently, if you have dependent children under the age of 17, the IRS allows you to claim a tax credit of up to $1,000 per child on your tax return (subject to income restrictions). The new tax bill will double this credit and make it more refundable, meaning if you don’t owe any federal income taxes for a given year, you will get an actual refund check back from the IRS, up to $1,400.
The new tax bill also includes an additional $500 tax credit for dependents who are over the age of 17. So, if you’re taking care of a dependent parent at home, you could qualify for this non-refundable tax credit (income restrictions apply).
Deductions for medical expenses will be expanded for 2018 only. Under the new bill, the amount of medical expenses you can deduct increases. Currently, expenses that exceed 10 percent of your total Adjusted Gross Income (AGI) can be deducted. The new rules will temporarily drop that floor to 7.5% of AGI. If you have been delaying medical expenses or are planning an elective procedure, this would be a great opportunity to take advantage of this tax benefit.
And last but certainly not least, the upcoming tax reform includes your favorite craft alcoholic beverage. The final tax bill decreases the excise taxes for beer breweries from $18 a barrel to $16. It also provides a credit against wine excise taxes for all wine producers and importers. This is all good for the cause of alcohol consumption, especially if it translates to lower retail prices on beer and wine. Bottoms up!
If you’re interested in some of the more detailed intricacies of the Tax Cuts and Jobs Act of 2017, here is the direct link to the 1,000+ page proposal: LINK. Also, feel free to contact me or any of my colleagues here at Navigoe with your thoughts, questions, or concerns.