I was originally going to use “Forward” instead “Ahead” in the title, but I couldn’t get myself to put “looking forward to taxes” in any form. In fact, a reasonable argument could be made that I’m procrastinating doing my 2017 taxes right now.*
When the Tax Cuts and Jobs Act was passed last year, I planned to write an article about what it meant for our family. I’d love to be able to tell you what it means for yours, but it is very complex and it touches so many areas of everyone’s financial life. Truth be told, I need to see my own tax advisor to get a better idea of what it means for us. (That’s perhaps just the motivation I need to get 2017’s taxes done.)
Fortunately, March’s issue of Money Magazine does a decent job of breaking down some of the big areas of the change with an article called “What the Tax Law Means for You.” I was hoping to find the article online, but I could. When I was reading it, I have to admit that I got a little excited. I don’t believe that the new tax law is a positive for America on the whole, but at least it looks like we’ll do well.
The article lays out a number of scenarios that I’ll cover in order:
“You Have a Middle Class Job”
This section indicates that those who are earning $49,000 to $86,000 will save on average, $930. Those from $86,000 to $149,000 will save more… $1,810. My dog sitting and blogging income isn’t that great (I’m focused on other things), but my wife does well as an active duty pharmacist. We usually are in that second bucket of taxable income.
Money magazine provides a chart of several profiles and what their taxes might be. Unfortunately the married with two kids (us!) profiles are for incomes of $30,000 – $75,000. The married with no kids (not us!) profiles are $135,000 income (us!) in high-tax (us!) and low-tax states. Finally, there’s a wealthy ($250,000) single business owner with no kids. While my blog puts me as a business owner, I’m certainly not wealthy, single, with no kids.
This should save us some money because the double standard deduction and double child credit are probably better than what we’ll have in 2017. This means that we might not have to itemize.
“You’re a Working Freelancer”
People working for themselves will be able to take a 20% deduction on their income. Like everything with tax law, it isn’t as simple as that, but that’s the gist. It seems that my blogging and dog sitting income fit firmly in this area. This is one of the areas that won’t impact a large percentage of people, but I happen to be lucky enough to fall into this bucket.
“You’re Buying or Selling a House”
We have no plans to buy or sell houses any time soon. The big tax change here added caps for deducting mortgage interest and property taxes. I think we’re going to be lucky here too. We bought our home in 2011 and refinanced to a 15-year mortgage in 2013. Mortgages are structured so that the mortgage interest is the most in the first few years and it gradually reduces until the end when you are mostly paying principle. So we have had a few years of deducting the high mortgage interest and are moving into the lower mortgage interest territory.
That refinance to a 15-year mortgage is looking better. As my father used to say, “Sometimes it’s better to be lucky than good.”
Our property taxes (and other associated taxes should fit well under the $10,000 cap. My friends in California, New York, and Massachusetts are probably not as lucky.
I suspect the double standard deduction will be better for us.
There’s a prediction that our home won’t appreciate as much due to the changes. However, as we don’t intend to sell any time soon, there’s no real immediate impact to us.
“You’re Paying for School”
This is a change where 529 plans can be used to pay for private schools, age K-12. This is us… we pay for private school. We plan to pay for the current school until 8th grade… and after that we’ll re-evaluate.
In fact, we’ve been saving money in a Coverdell, precisely because they can be used for private schools. Unfortunately, Coverdell contributions are limited to $2000 a year, per child. So if we save $2000 each year for the kids through the first 6 grades, we’ll probably be able to use the Coverdell for the 7th and 8th grades.
The new law allows for 529s to be used, which aren’t limited like Coverdells. This could be good news for some extremely wealthy people. For us, the current cost of private school, saving for retirement, 15-year mortgages, etc. means that we don’t have a ton of money left over to put into a 529 plan.
The other flaw with this is that the money that is going to be used for K-12 schooling doesn’t have a lot of time to compound. Maybe if you put a lot of money in at birth of a child you can get 15 years of compound interest for the last couple of years of private high school. However, at that point, most people would probably be thinking, “This money is best left to compound another year or two for college.”
This feels like something that politicians stuffed in because it helped them or other extremely high-income people.
“You’re Saving For Retirement”
The point that Money Magazine makes here is that the reduced corporate taxes will translate well to companies’ bottom lines. That’s good for stock prices. So if you are investing in equities for retirement, you might see those accounts go up in value.
We’re a little less than 20 years from being able to access most of our retirement accounts, but the plan is to not touch them for longer than that. I’m not convinced this tax rate will still be helpful 20-30 years in the future. Maybe it will, but I’m not counting on it. Let’s check back then and we’ll see.
Conclusion
In almost every case, we stand to do better with the new tax law. In some cases, like the buying and selling of houses, there may not be any real change for us. In most of the other areas though, we either stand to do better or, get more options (like with the change in 529 plans).
I don’t know how we managed to be so lucky to catch all these potential tax breaks. I’ll check back in when I get more information from my tax professional.
* A better argument could be that my preschoolers are on their two week spring break. We spent a few days at the University of Florida so my wife could complete some graduate work. That was one of the reasons why we hacked Disney World for 5 days… we already had to fly close to there anyway. That was followed up by my wife going to her annual pharmacist convention while I returned back with the kids. Long story short, there hasn’t been a lot of working time for me, anyway, much less time to do taxes.
The double standard deduction hurts, not helps, families with two parents and two or more kids, since they removed exemptions as part of the changes. 4 exemptions were more than the standard deduction for MFJ, so, no exemptions + a double size standard deduction = more taxable income. And if you itemized deductions before, but won’t now, that’s an additional increase to taxable income.
That said, I won’t miss tracking and data entry for all those thrift store donation receipts.
So maybe it won’t all be positive. I rarely went through my taxes after our tax person does it, so I haven’t been keeping track of exemptions there are for kids before.
I won’t miss tracking receipts either.
I think we’ll do better with taxes in 2018 too. The biggest impact will be the 20% deduction from SE tax. That’s a nice chunk.
The 529 is good if you have high state tax. You can get state tax deduction right away even if you use it for private school right away. Better than nothing.
I’ll have to double check exemption. We’ll probably be pretty close because we have a lot of deductions.
It would be good if we could use that state tax trick, but Rhode Island limits the deduction to only $1,000 per married couple per year. We already max that out easily with saving for college normally. For other states that don’t have this limit, I believe they are looking to put limits in because they don’t want to lose all this tax revenue for something that was done at the federal level. At least, I think I saw that somewhere.
It looks like all my current deductions are about a toss up with the new standard deduction, but we lose the individual so I’ll end up paying more. If you don’t have deductible kids, even if you might still provide them some amount of support, you lose on the new plan.
People lay out there long term tax strategy years on advance, then it’s changed on a whim? Not seeing this turning out well. Of course, we are adding to the deficit at the highest rate in history so it really may not matter in a few years anyway. If you read The Art of the Deal when it came out decades ago(I did) you know the current president runs his businesses on OPM. I’m not sure he ever actually “owned” anything, just has his name on a bunch of extreme highly leveraged businesses.
“People lay out there long term tax strategy years on advance, then it’s changed on a whim?”
That’s a great point. I can see some minor tweaks each year, but big changes like this seems questionable. I think it would have been even more questionable, but since it cut taxes (by increasing the deficit even more) few people end up paying more.
Remember how big the “cash for clunkers” debate was? That was just for $3 billion in federal funds. This tax act was for something like 1.5 trillion, which should put it in perspective.