Retirement Planning, And The 2018 Tax Laws

Whatever you may think about the new tax laws, there may be a couple of advantages for retirement planners to take note of. Some of the changes are slated to end after 8 years, but until that actually happens (maybe it will, maybe it won't?), this is what I have noticed:

       • As you know, if you itemize a tax deduction for mortgage interest, the deduction becomes less and less each year as you pay off the mortgage. However, the new, and larger, Standard Deduction may help to offset that loss in deductions in the later stages of the mortgage (and after it ends). For example, in the past, a married couple filing jointly, who have paid off their mortgage, would only be able to deduct their real estate taxes (let's say $5,000), and two personal exemptions ($4,050 each, for a total of $8,100). For simplicity, we're not considering other possible deductions. But the itemized deduction of $5,000 is less
than the old Standard Deduction of $12,700, making it more beneficial to use the Standard Deduction (and personal exemptions). Their tax deductions would total $20,800.

Starting in 2018, the Standard Deduction for couples filing jointly will be $24,000 (there are no more personal exemptions), or $3,200 more than the deduction they would have claimed previously. Itemizing other possible deductions (State Income Tax?) may still make it worthwhile to itemize, but if not, the lower amount of tax owed under the new laws could have a significant (positive) impact on retirement savings since that money is being saved (not spent) year after year.

       • If you have children, the increased Child Tax Credit (for children under 17 years old) could also help to reduce your tax liability. The income thresholds have been raised quite a bit (to $440,000 for couples, and $240,000 for others) giving you the potential to reduce your tax bill by $2,000 per child. Remember, this is a tax credit, not a deduction. That means that it directly reduces the total tax that you owe, after all taxes have been calculated (a tax deduction lowers your taxable income in order to calculate any tax owed). Again, reducing your tax liability is the same as saving money since it is money that is not spent.

You may be thinking, "How does this help - I won't have a mortgage, or kids under 17, in retirement." That may be true, but retirement planning isn't about what happens when you retire, it's about what you should be doing now to make sure that you can retire. The less you pay in taxes now, the more money you can save/invest in retirement savings. That money will grow year over year, helping you to reach your retirement goal that much sooner (or, make it last that much longer in retirement).

A couple of other tax changes to be aware of:
        • In the past, medical expenses that exceed 10% of your adjusted gross income could be listed as an itemized tax deduction. Starting this year, they may still be itemized, but the expense threshold has been lowered to 7.5% of adjusted gross income.
        • Important - Starting in 2018, you may still itemize deductions for: real estate taxes, State income tax (State sales tax for states without income tax), Charity, and Medical expenses (greater than 7.5% of adjusted gross income). However, the total deduction allowed for real estate taxes and State income/sales tax combined is $10,000. That's the one tax change that may have the effect of reducing your itemized deductions.

   • There are still 7 levels of progressive income tax rates, but the thresholds for each have been raised a bit, and the tax rate for each level reduced a bit. That may help in paying a little less in total tax as well.

Of course, the 2018 Complete Retirement Planner takes all of this into account for you! If you've been using the 2017 Complete Retirement Planner, you may notice a positive change in your results with the 2018 version due to these tax changes (here's hoping!). Of course, everyone's situation is unique, but at least being aware of the tax changes may help you to make better informed decisions going forward. If you do end up paying less taxes, do everything you can to take whatever you may "save", and add it to your retirement savings. With historically average results, you can double that money every 10 years, and there's nothing better than "free" money!

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