By Brittany N. Cox, Associate Advisor at Nestlerode & Loy, Inc.
We have already seen impacts of the lower corporate tax rate that is part of the new tax legislation passed in December. Starting in 2018 the corporate tax rate will be cut from 35 percent to 21 percent. For example, Walmart is raising its starting wage to $11 per hour. Apple announced on Wednesday that it will capitalize on the new tax law and bring back the majority of its $252 billion in cash that it holds outside the United States. Health insurance company Humana announced Wednesday it also will be raising the hourly minimum wage for all of its employees to $15 per hour.
In addition to benefiting corporations, the new tax policy will affect individuals in several ways. One of the changes includes a new structure to 529 College Savings Plans. The Act expands the use of 529 savings plans to be used for private K-12 education. Previously, funds could be deposited into a 529 tax-free but could only be used to pay for qualifying college expenses. This amendment allows families to save and utilize pre-tax dollars to pay for their child’s education, even at the primary and secondary levels. Qualified expenses for K-12 do not include books and supplies, computers, or room and board. There is also a limit of $10,000 per beneficiary per year for K-12 expenses.
The plan also doubles the standard deduction. A single filer’s deduction increases from $6,350 to $12,000 and for married and joint filers it increases from $12,700 to $24,000. It’s worth keeping in mind that it will revert back in 2026. Personal exemptions are eliminated which previously allowed taxpayers to subtract $4,150 from income for each person they claimed as a dependent. The act also eliminates most itemized deductions including moving expenses, mortgage interest, and alimony payments. It caps the state and local tax deduction at $10,000 combined. The plan keeps deductions for charitable contributions, retirement savings, and student loan interest. However, it is assumed that many fewer people will be itemizing on their returns.
One concern with the decline in itemizations lies with non-profit organizations. If folks are no longer itemizing, they do not have the tax deduction that helps prompt charitable giving. However, using an RMD to make a charitable contribution is still tax-free and does not require itemizing. At age 70½ individuals become required to take a minimum distribution from their IRA account(s). There is a penalty of 50 percent of the amount that should have been withdrawn if the RMD is not taken. Since some individuals are in a position of not needing the distribution for living expenses, there is the option to avoid tax and donate the RMD directly to charity. This distribution cannot be claimed as a charitable contribution tax deduction. This money is not taxed, therefore, it does not count as a deduction for those who do happen to itemize.
Another way to save on your taxes while giving to charity is gifting appreciated stock. This is beneficial because you will not be taxed on the gains and the charitable organization will not be taxed when they sell the stock. If you do exceed the standard deduction and itemize, you will also be able to deduct the value of the donation on your tax return.
This is just a brief overview of some of the changes coming in 2018. You should consult with your financial advisor and tax preparer for more information on what these changes will mean to you since each individual will be affected in different ways.
