4 Ways the New Tax Changes Affect Your Finances

From new tax rates to changes in saving for your child's education, here are four things to try to improve your finances in 2018.

As hectic as December tends to be, with holiday travel, festivities and year-end deadlines, you may not have had time to sort out what the new tax law really means for your situation. Now that you have put away the holiday decorations and you’re back to a regular routine, with the kids back to school, it’s time to plan for the new reality.

Many people rushed to take advantage of the time between Christmas and New Year’s to increase charitable contributions, prepay property taxes and accelerate business expenses to take advantage of deductions that will be significantly reduced or eliminated in 2018. But if you missed the boat on those year-end opportunities, don’t worry. There are some things you can still do in the new year to improve your tax situation and your overall financial health in 2018.

Remember: Tax preparation is a single event, whereas tax planning is an ongoing progress. It’s important to make adjustments based on changes in tax laws, financial markets and your overall situation. With that in mind, here are some of the changes and strategies to implement.

1. Be Proactive with Your W-4.

While there aren’t fewer income tax brackets in 2018, tax rates have been lowered. The rates in 2017 were 10%, 15%, 25%, 28%, 33% 35% and 39.6%. In 2018, they are (for singles):

  • 10% ($0 to $9,525)
  • 12% ($9,526 to $38,700)
  • 22% ($38,701 to $82,500)
  • 24% ($82,501 to $157,500)
  • 32% ($157,501 to $200,000)
  • 35% ($200,001 to $500,000)
  • 37% (over $500,000)

And for married couples who file jointly, they are:

  • 10% ($0 to $19,050)
  • 12% ($19,051 to $77,400)
  • 22% ($77,401 to $165,000)
  • 24% ($165,001 to $315,000)
  • 32% ($315,001 to $400,000)
  • 35% ($400,001 to $600,000)
  • 37% (over $600,000)

What does this mean for you? If your overall tax rate is decreasing, consider decreasing the amount of your federal tax withholdings so that you can increase your net take-home pay. While some people like having a fat tax refund come April, why give Uncle Sam your money before you have to? To adjust the amount of tax withholding from your paycheck, complete a W-4 form.

2. Make an Investment in Knowledge.

If one of your goals is to save more for your child’s private school lower education, look no further than 529 college savings plans. The Tax Cuts and Jobs Act added a provision to allow account owners to access up to $10,000 per year for K-12 expenses tax free starting in 2018. 529 college savings plans are investment accounts that offer tax-free growth. In addition to tax-free growth, 34 states and the District of Columbia offer state tax deductions or credits for 529 plan contributions. And six states — Arizona, Kansas, Minnesota, Missouri, Montana and Pennsylvania — allow their residents to deduct their contributions to any state’s 529 plan. In fact, I have helped grandparents from Pennsylvania & Arizona establish 529 plans for their twin granddaughters!

3. Take Advantage of Student Loan Interest Deductions.

Remember, every dollar you can invest for college today means less money that you or your student will need to borrow in the future. But if you have to take a loan to pay for college, be aware that there is still a tax break available in the new tax law. Before the final tax law was hammered out, earlier versions of the bill proposed ending the student loan interest deduction. That didn’t happen. Instead, the law left it unchanged. So, for 2018 (just as for 2017), the maximum amount eligible for student loan interest deduction is $2,500.

But what if you don’t itemize? It’s not a problem. The Tax Cuts and Jobs Acts increases the standard deduction to $12,000 for individuals, $18,000 for heads of households and $24,000 for married couples filing jointly. Because of this increase, more taxpayers will select the standard deduction and will not itemize deductions for charitable contributions and property taxes. However, the student loan interest deduction is still available for taxpayers who don’t itemize their taxes, depending on their situation, because it is claimed as an adjustment to income.

4. Medical Expenses.

If you anticipate significant medical, dental or orthodontic expenses in the new year and beyond, consider scheduling your procedures or starting treatment sooner as opposed to later. For tax year 2018, you can deduct out-of-pocket medical expenses that exceed 7.5% of your adjusted gross income. In 2019, your out of pocket medical expenses will need to exceed 10% of your adjusted gross income to be eligible for an itemized deduction.

Two Bonus Ideas for a Financially Healthy New Year

Start the new year off on the right foot. If you need to replenish your cash reserves, want to avoid the dent from a holiday spending hangover, or resolve to invest for retirement, allocate any “found money” from the holidays (such as a check from Grandma or a holiday bonus from work) toward your financial goals and objectives.

The tax-filing deadline for 2017 is April 17, 2018. My advice is to use this time to organize your paperwork and review what itemized deductions you have on prior tax returns. Tax changes don’t have to be overwhelming or taxing. As illustrated above, it’s important to understand the impact that these tax changes can have more than one area of your financial life.

The most important takeaway is to recognize how these changes affect your situation and adjust accordingly. Don’t make tax decisions in isolation. Take a comprehensive view of your finances.

About the Author

Marguerita M. Cheng, CFP®

CEO, Blue Ocean Global Wealth

Marguerita M. Cheng is the Chief Executive Officer at Blue Ocean Global Wealth. She is a CFP® professional, a Chartered Retirement Planning Counselor℠, Retirement Income Certified Professional and a Certified Divorce Financial Analyst. She helps educate the public, policymakers and media about the benefits of competent, ethical financial planning.

Most Popular

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math
retirement planning

Retirement Income Shouldn’t Depend on the Market; It Should Depend on Math

The math isn’t as tough as you might think. It all starts with dividing your assets into three different buckets.
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Why Are Gas Prices Still Going Up?

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is heading back toward its March highs. What’s driving the resurgence, and will gas prices go down anytime soon?
May 23, 2022


Where's My Refund? How to Track Your Tax Refund Status
tax refunds

Where's My Refund? How to Track Your Tax Refund Status

The IRS has an online tool that lets you track the status of your tax refund.
May 25, 2022
Which States' Taxes Are Going Down
Tax Breaks

Which States' Taxes Are Going Down

State lawmakers are cutting income, sales and property taxes to return budget surpluses to residents.
May 25, 2022
This Couple Tackles Love and Money as a Team
Getting Married

This Couple Tackles Love and Money as a Team

Fyooz Financial, the husband and wife team of Dan and Natalie Slagle, have carved out a niche advising other couples with the money questions that com…
May 24, 2022
How to Find the Perfect Balance Between Spending and Saving

How to Find the Perfect Balance Between Spending and Saving

It's the key to being able to enjoy life now AND in the future. It's also the basis for a successful retirement plan, and it all starts with setting y…
May 24, 2022