A little time spent planning for the year ahead can go a long way towards ensuring you are minimizing the income taxes you pay. The IRS has released its changes for the new tax year. We have summarized a few of the important ones below for you to review. Remember these are changes for tax year 2017, meaning they will be accounted for on the return you’ll file in 2018.
- The income tax brackets have shifted up a bit to account for modest inflation, but the rate-range of 10% – 39.6% is unchanged. Likewise, the standard deduction has risen by $50 whether you’re filing as a single ($6,350), married filing separately ($6,350) or head of household ($9,350). If you file jointly as a married couple, the standard deduction has risen by $100 ($12,700).
- Retirement Plan Changes: The annual contribution limit for 401K plans is unchanged at $18,000, with a $6,000 catch up for those 50 or older. The limits for an IRA stay at $5,500 with a $1,000 catch-up. Remember that if you or your spouse has a retirement plan at work, contributions to your IRA may also be limited or even disallowed depending on your income and filing status. Annual contribution limits for self-employed (SEP) IRAs and solo 401K plans rise by $1,000 for 2017, to $54,000. The annual benefit limit of Defined Benefit Plans (pension plans for the self employed) rises by $5,000, to $215,000.
- The Alternative Minimum Tax (AMT) exemption for tax year 2017 is $54,300 for singles, $84,500 for married filing together and $42,250 for married filing separately. The tax will phase out beginning at $120,700 for singles, $160,900 for married filing jointly and $80,450 for married filing separately.
- The estate tax exemption rises to $5.49 million in 2017 (up from $5.45 million).
- If you itemize deductions, the “Pease Limitations“ will kick in at adjusted gross incomes (AGI) of $258,250 (singles), $154,950 (married filing separately), $309,900 (married filing jointly) and $284,050 (head of household). In general, these limitations reduce many of your deductions by the lesser of: 3% of the amount that your AGI exceeds the threshold, or 80% of your total deductions subject to the limits.
- The so called “kiddie” tax threshold has risen to account for inflation. For children up to age 18, or children in college up to age 23, unearned income below $1,050 triggers no federal income tax liability.
- If in the past you’ve taken advantage of being over age 65 by deducting medical expenses that exceed 7.5% of your AGI, take note. As of 2017 no one may take medical expense deductions unless the expenses exceed 10% of your AGI.
Since 2016 was no ordinary year, we need to add a caveat here. The presidential election could mean changes to the tax code far beyond those outlined above. For instance, during the campaign Donald Trump indicated an interest in simplifying the income tax brackets (from seven to three), and eliminating the AMT and estate tax altogether. The eventual changes will take time to play out.
A full discussion of all the tax laws, of course, not to mention the nuances applicable to your own family’s situation, is beyond the scope of this communication. Let us know if you have any concerns. And to get the full picture, consult with a professional tax advisor. If you don’t have one, we can help you find one. At PARTNERSINWEALTH we act as your PERSONALCFO, enhancing the effectiveness of your other advisors to put you in control, so instead of worrying about your financial life you can live your whole life. To learn more, please contact Jim Waters, CFP®, at 713.964.4028 or email@example.com.