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Important Tax Changes for 2018

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Important Tax Changes for 2018

The new year brings in sweeping changes to current tax laws, including alterations that could affect your income tax rate, Social Security benefits, and retirement savings. Here is a quick summary of the major changes:

  • Tax rates have been reduced across the board. The tax brackets themselves have been expanded so that more taxpayers fall into lower brackets.
  • The standard deduction has been increased for both single individuals ($12,000) and married couples ($24,000). This will reduce the number of taxpayers that choose to itemize their deductions using Schedule A. In 2014, only 29% of taxpayers itemized their deductions. It is probable that even fewer taxpayers will itemize going forward as the new standard deduction could represent more than the total of standard itemized deductions (mortgage interest, state/local tax, charitable deductions, etc.).
  • The personal exemption (now $4,050) is ending, but a child tax credit is increasing from $1,000 to $2,000. Also, the income guidelines have been expanded, making this credit more attainable. (This change may work great for those with children under age 17, it may impact families negatively for those whose children are in college and are still dependents.) Remember that a tax credit is a dollar-for-dollar reduction of your tax liability, as opposed to the previous personal exemption, which exempts a portion of your earnings from taxes.
  • Some of the popular deductions are no longer available. For example, tax preparation fees and investment advisory fees are no longer deductible.
  • There is now a cap of $10,000 on the deductibility of SALT taxes (State and Local taxes). Those folks with high property taxes or living in high income or sales tax states will be impacted by this. For those of you in New Hampshire who commute to Massachusetts, Maine or Vermont, you may be negatively affected.
  • The medical expense deduction has been restored to 7.5% from 10% excess of adjusted gross income. This is important for families with significant medical expenses.

Also, there have been some routine changes. For example, retirement savings levels for 2018 have been revised: Employees may increase 401(k) contributions to $18,500 — a $500 boost over the past few years. The maximum contribution (employer and employee combined) will increase by $1,000 for a total of $55,000 a year. Unfortunately, there is no change for the “catch-up” contribution for people age 50 and older, which will remain at $6,000. IRA contributions, including the catch-up provision, will also stay the same at $5,500 and $1,000, respectively.

For those receiving Social Security, you may have noticed a slight increase this year. Last October, the Social Security Administration announced cost-of-living adjustments for 2018 benefits. Starting in January, monthly Social Security and Supplemental Security Income (SSI) benefits will increase by 2.0 percent, which will yield approximately $25 extra a month for the average beneficiary. However, the cost of Medicare has gone up similarly, eating up most of the increase.

For individuals still in the workforce, the maximum amount of earnings subject to the Social Security tax will increase from $127,200 to $128,700. This increase will cause about 12 million American workers to pay more in Social Security taxes.

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