By now, we’re all aware of the significant changes to the tax code that were signed into law by the President at the end of 2017. The headlines have been focused on lower marginal tax brackets and the increased standard deduction. Here are a few details of the plan that have flown under the radar:
Deductibility of Medical Expenses
For the 2018 tax year, you can deduct any out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income. The threshold increases to 10% again beginning in 2019 (thereby decreasing the amount you can deduct). Keep this in mind if you’re on the fence about whether to schedule an expensive medical procedure this year versus delaying it.
529 Plan Flexibility
Until now, any money held in 529 plans could only be used to fund qualified college expenses. The new tax plan allows for up to $10,000 per year to pay for elementary or secondary school expenses.
Expansion of the Child Tax Credit
Not only was the child tax credit doubled to $2,000 but the income phaseout was increased to $400,000 for a married couple. This means that many couples who weren’t eligible for the credit in past years due to their income will now be able to take advantage.
Elimination of Equity Loan Interest Deduction
Many have traditionally tapped into the equity in their home as a low-cost way to borrow for things like new cars, vacations or college tuition. The interest rate on home equity loans and lines of credit are typically low and, until now, tax deductible. Beginning this year, taxpayers can no longer deduct the interest they pay on home equity loans or lines of credit. If you
currently own your home, you can continue to deduct the interest paid on home mortgage debt up to $1 million. If you buy a home now, that debt limit for deduction decreases to $750,000.
It is important for all of us to understand how the new tax code affects us. Don’t be caught off guard and assume that a few extra dollars in your pay check means a lower overall tax bill at year-end. The decrease in tax withholding could be offset by a decrease in your deductions. Take the time to analyze your 2017 tax return and make some assumptions for 2018. This will help you plan for the year ahead and avoid any nasty tax surprises.