Moving Expenses Are No Longer Deductible
If you were planning on moving this year to take a new position with a new company or even a new position within your current employer, the moving process just got a little more expensive. Not only is it expensive, but it can put you under an intense amount of stress as there will be lots of things that you need to have in place before packing up and
If you were planning on moving this year to take a new position with a new company or even a new position within your current employer, the moving process just got a little more expensive. Not only is it expensive, but it can put you under an intense amount of stress as there will be lots of things that you need to have in place before packing up and moving. Even things like how you are going to transport your car over to your new home, can take up a lot of your time, and on top of that, you have to think about how much it's going to cost. Prior to the tax law changes that took effect January 1, 2018, companies would often offer new employees a "relocation package" or "moving expense reimbursements" to help subsidize the cost of making the move. From a tax standpoint, it was great benefit because those reimbursements were not taxable to the employee. Unfortunately that tax benefit has disappeared in 2018 as a result of tax reform.
Taxable To The Employee
Starting in 2018, moving expense reimbursements paid to employee will now represent taxable income. Due to the change in the tax treatment, employees may need to negotiate a higher expense reimbursement rate knowing that any amount paid to them from the company will represent taxable income.
For example, let’s say you plan to move from New York to California and you estimate that your moving expense will be around $5,000. In 2017, your new employer would have had to pay you $5,000 to fully reimburse you for the moving expense. In 2018, assuming you are in the 35% tax bracket, that same employer would need to provide you with $6,750 to fully reimburse you for your moving expenses because you are going to have to pay income tax on the reimbursement amount.
Increased Expense To The Employer
For companies that attract new talent from all over the United States, this will be an added expense for them in 2018. Many companies limit full moving expense reimbursement to executives. Coincidentally, employees at the executive level are usually that highest paid. Higher pay equals higher tax brackets. If you total up the company's moving expense reimbursements paid to key employees in 2017 and then add another 40% to that number to compensate your employees for the tax hit, it could be a good size number.
Eliminated From Miscellaneous Deductions
As an employee, if your employer did not reimburse you for your moving expenses and you had to move at least 50 miles to obtain that position, prior to 2018, you were allowed to deduct those expenses when you filed your taxes and you were not required to itemize to capture the deduction. However, this expense will no longer be deductible even for employees that are not reimbursed by their employer for the move starting in 2018.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Warning To All Employees: Review The Tax Withholding In Your Paycheck Otherwise A Big Tax Bill May Be Waiting For You
As a result of tax reform, the IRS released the new income tax withholding tables in January and your employer probably entered those new withholding amounts into the payroll system in February. It was estimated that about 90% of taxpayers would see an increase in their take home pay once the new withholding tables were implemented.
As a result of tax reform, the IRS released the new income tax withholding tables in January and your employer probably entered those new withholding amounts into the payroll system in February. It was estimated that about 90% of taxpayers would see an increase in their take home pay once the new withholding tables were implemented. While lower tax rates and more money in your paycheck sounds like a good thing, it may come back to bite you when you file your taxes.
The Tax Withholding Guessing Game
Knowing the correct amount to withhold for federal and state income taxes from your paycheck is a bit of a guessing game. Withhold too little throughout the year and when you file your taxes you have a tax bill waiting for you equal to the amount of the shortfall. Withhold too much and you will receive a big tax refund but that also means you gave the government an interest free loan for the year.
There are two items that tell your employer how much to withhold for federal income tax from your paycheck:
Income Tax Withholding Tables
Form W-4
The IRS provides your employer with the Income Tax Withholding Tables. On the other hand, you as the employee, complete the Form W-4 which tells your employer how much to withhold for taxes based on the “number of allowances” that you claim on the form.
What Is A W-4 Form?
The W-4 form is one of the many forms that HR had you complete when you were first hired by the company. Here is what it looks like:
Section 3 of this form tells your employer which withholding table to use:
Single
Married
Married, but withhold at higher Single Rate
Section 5 tells your employer how many "allowances" you are claiming. Allowance is just another word for "dependents". The more allowances your claim, the lower the tax withholding in your paycheck because it assumes that you will have less "taxable income" because in the past you received a deduction for each dependent. This is where the main problem lies. Due to the changes in the tax laws, the tax deduction for personal exemptions was eliminated. This may adversely affect some taxpayers the were claiming a high number of allowances on their W-4 form because even though the number of their dependents did not change, their taxable income may be higher in 2018 because the deduction for personal exemptions no longer exists.
Even though everyone should review their Form W-4 form this year, employees that claimed allowances on their W-4 form are at the highest risk of either under withholding or over withholding taxes from their paychecks in 2018 due to the changes in the tax laws.
How Much Should I Withhold From My Paycheck For Taxes?
So how do you go about calculating that right amount to withhold from your paycheck for taxes to avoid an unfortunate tax surprise when you file your taxes for 2018? There are two methods:
Ask your accountant
Use the online IRS Withholding Calculator
The easiest and most accurate method is to ask your personal accountant when you meet with them to complete your 2017 tax return. Bring them your most recent pay stub and a blank Form W-4. Based on the changes in the tax laws, they can assist you in the proper completion of your W-4 Form based on your estimated tax liability for the year.If you complete your own taxes, I would highly recommend visiting the updated IRS Withholding Calculator. The IRS calculator will ask you a series of questions, such as:
How many dependents you plan to claim in 2018
Are you over the age of 65
The number of children that qualify for the dependent care credit
The number of children that will qualify for the new child tax credit
Estimated gross wages
How much fed income tax has already been withheld year to date
Payroll frequency
At the end of the process it will provide you with your personal results based on the data that you entered. It will provide you with guidance as to how to complete your Form W-4 including the number of allowances to claim and if applicable, the additional amount that you should instruct your employer to withhold from your paycheck for federal income taxes. Additional withholding requests are listed in Section 6 of the Form W-4.
Avoid Disaster
Having this conversation with your accountant and/or using the new IRS Withholding Calculator will help you to avoid a big tax disaster in 2018. Unfortunately, many employees may not learn about this until it's too late. Employees that are used to getting a tax refund may find out in the spring of next year that they owe thousands of dollars to the IRS because the combination of the new tax tables and the changes in the tax law that caused them to inadvertently under withhold federal income taxes throughout the year.
Action Item!!
Take action now. The longer you wait to run this calculation or to have this conversation with your accountant, the larger the adjustment may be to your paycheck. It's easier to make these adjustments now when you have nine months left in the year as opposed to waiting until November.I would strongly recommend that you share this article with your spouse, children in the work force, and co-workers to help them avoid this little known problem. The media will probably not catch wind of this issue until employees start filing their tax returns for 2018 and they find out that there is a tax bill waiting for them.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
The Top 2 Strategies For Paying Off Student Loan Debt
With total student loan debt in the United States approaching $1.4 Trillion dollars, I seem to be having this conversation more and more with clients. There has been a lot of speculation between president obama and student loans, but student loan debt is still piling up. The amount of student loan debt is piling up and it's putting the next generation of
With total student loan debt in the United States approaching $1.4 Trillion dollars, I seem to be having this conversation more and more with clients. While you yourself may not have student loan debt, at some point you may have to counsel a child, grandchild, friend, neighbor, or a co-worker that just can't seem to get ahead because of the financial restraints of their student loan payments. After all, for a child born today, it's projected that the cost for a 4 year degree including room and board will be $258,491 for a State College and $607,848 for a private college. That’s over a half a million dollars for a 4-year degree!!
The most common reaction to this is: "There is no way that this can happen. Something will have to change." As financial planners, we were saying that exact same thing 10 years ago but we don't say that anymore. Despite the general disbelief that this will happen, the cost of college has continued to rise at a rate of 6% per year over the past 15 years. It's good old supply and demand. If there is a limited supply of colleges and the demand for a college degree keeps going up, the price will continue to go up. As many of us know, a college degree is not necessarily an advantage anymore, it's the baseline. You need it just to get the job interview and that will be even more true for types of jobs that will be available in future years.
No Professional Help
Making matters worse, most individuals that have large student loan debt don't have access to high quality financial planners because they do not have any investible assets since everything is going toward paying down their student loan debt. I wrote this article to give our readers a look into how we as Certified Financial Planners® help our clients to dig out of student loan debt. Unfortunately, a lot of the advice that you will find by searching online is either incomplete or wrong. The solution for digging out of student loan debt is not a one size fits all solution and there are trap doors along the way.
Loan Inventory
The first step in the process is to collect and organize all of the information pertaining to your student loan debt. Create a spreadsheet that lists the following information:
Name of Lender
Type of Loan (Federal or Private)
Name of Loan Servicer
Total Outstanding Loan Balance
Interest Rate
Fixed or Variable Interest Rate
Minimum Monthly Payment
Current Monthly Payment
Estimated Payoff Date
Now, below this information I want you to list January 1 of the current year and the next 10 years. It will look like this:
Total Balance
January 1, 2025
January 1, 2026
January 1, 2027
Each year you will record your total student loan debt below your itemized student loan information. Why? In most cases you are not going to be able to payoff your student loans overnight. It’s going to be a multi-year process. But having this running total will allow you to track your progress. You can even add another column to the right of the “Total Balance” column labelled “Goal”. If your goal is to payoff your student loan debt in five years, set some preliminary balance goals for yourself. When you receive a raise or a bonus at work, a tax refund, or a cash gift from a family member, this will encourage you to apply some or all of those cash windfalls toward your student loan balance to stay on track.
Order of Payoff
The most common advice you will find when researching this topic is “make minimum payments on all of the student loans with the exception of your student loan with the highest interest rate and apply the largest payment you can against that loan”. Mathematically this is the right strategy but we do not necessary recommend this strategy for all of our clients. Here’s why……..
There are two situations that we typically run into with clients:
Situation 1: “I’m drowning in student loan debt and need a lifeline”
Situation 2: “I’m starting to make more money at my job. Should I use some of that extra income to pay down my student loan debt or should I be applying it toward my retirement plan or saving for a house?”
Situation 1: I'm Drowning
As financial planners we are unfortunately running into Situation 1 more frequently. You have young professionals that are graduating from college with a 4 year degree, making $50,000 per year in their first job, but they have $150,000 of student loan debt. So they basically have a mortgage that starts 6 months after they graduate but that mortgage payment comes without a house. For the first few years of their career they are feeling good about their new job, they receive some raises and bonuses here and there, but they still feel like they are struggling every month to meet their expenses. The realization starts to set in the “I’m never going to get ahead because these student loan payments are killing me. I have to do something.”
If you or someone you know is in this category remember these words: “Cash is king”. You will hear this in the business world and it’s true for personal finances as well. As mentioned earlier, from a pure math standpoint, the fastest way to get out of debt is to target the debt with the highest interest rate and go from there. While mathematically that may work, we have found that it is not the best strategy for individuals in this category. If you are in the middle of the ocean, treading water, with the closest island a mile away, why are we having a debate about how fast you can swim to that island? You will never make it. Instead you just need someone to throw you a life preserver.
Life Preserver Strategy
If you are just barely meeting your monthly expense or find yourself falling short each month, you have to stop the bleeding. In these situations, you should be 100% focused on improving your current cash flow not whether you are going to be able to payoff your student loans in 8 years instead of 10 years. In the spreadsheet that you created, organize all of your student loan debt from the largest outstanding loan balance to the smallest. Ignore the interest rate column for the time being. Next, begin making the minimum payments on all of your student loans except for the one with the SMALLEST BALANCE. We need to improve your cash flow which means reducing the number of monthly payments that you have each month. Once the month to month cash flow is no longer an issue then you can graduate to Situation 2 and revisit the debt payoff strategy.
This strategy also builds confidence. If you have a $50,000 loan with a 7% interest rate and two other student loans for $5,000 with an interest rate of 4% while applying more money toward the largest loan balance will save you the most interest long term, it’s going to feel like your climbing Mt. Everest. “Why put an extra $200 toward that $50,000 loan? I’m going to be paying it until I’m 50.” There is no sense of accomplishment. We find that individuals that choose this path will frequently abandon the journey. Instead, if you focus your efforts on the loans with the smaller balances and you are able to pay them off in a year, it feels good. Getting that taste of real progress is powerful. This strategy comes from the book written by Dave Ramsey called the Total Money Makeover. If you have not read the book, read it. If you have a child or grandchild graduating from college, if you were going to give them a check for graduation, buy the book for them and put the check in the book. Tell them that “this check will help you to get a start in your new career but this book is worth the amount of the check multiplied by a thousand”.
Situation 2: Paying Off Your Student Loans Faster
If you are in Situation 2, you are no longer treading water for a cash flow standpoint but now have the luxury paying off the higher interest rate student loans first and you may be able to commit more than just the minimum payment toward your student loans to pay them off faster. But in this stage, it’s also important to balance your other financial goal with paying off your student loan debt, such as:
Retirement savings
Saving for a house
Paying off student loan debt
Buying a new car
Don't Leave Free Money On The Table
Before applying all of your extra income toward your student loan payments, we ask our clients “what is the employer contribution formula for your employer’s retirement plan?” If it’s a match formula, meaning you have to put money in the plan to get the employer contribution, we will typically recommend that our clients contribute the amount needed to receive the full employer match. Otherwise you are leaving free money on the table.
The amount of that employer contribution represents a risk free rate of return. Meaning, unlike the investing in the stock market, you do not have to take any risk to receive that return on your money. If your company guarantees a 100% match on the first 5% of pay contribution out of your paycheck into the plan, your money is guaranteed to double up to 5% of your pay. Where else are you going to get a 100% risk free rate of return on your money?
Start With The Highest Interest Rate
Now that you have extra income each month you can begin to pick and choose how you apply it. You should list all of you student loans from the highest interest rate to the lowest. If it’s close between two interest rates but one is a fixed interest rate and the other is a variable interest rate, it’s typically better to pay down the variable interest rate loan first if interest rates are expected to move higher. Apply the minimum payment amount to all of your student loan payments and apply as much as you can toward the loan with the HIGHEST INTEREST RATE. Once the loan with the highest interest rate is paid off, you will move on to the next one.
Again, by applying more money toward your student loans, those additional payments represent a risk free rate of return equal to the interest rate that is being charges on each loan. For example, if the highest interest rate on one of your student loans is 7%, every additional dollar that you are apply toward paying off that loan you are receiving a 7% rate of return on because you are not paying that amount to the lender.
Here is a rebuttal question that we sometimes get: “But wouldn’t it be better to put it in the stock market and earn a higher rate of return?” However, that’s not an apples to apples comparison. The 7% rate of return that you are receiving by paying down that student loan balance is guaranteed because it represents interest that would have been paid to the lender that you are now keeping. By contrast, even though the stock market may average an 8% annualized rate of return over a 10 year period, you have to take risk to obtain that 8% rate of return. A 7% risk free rate of return is the equivalent of being able to buy a CD at a bank with a 7% interest rate guaranteed by the FDIC which does not exist right now.
But Can't I Deduct The Interest On My Student Loans?
It depends on how much you make. In 2025, if you are single, the deduction for student loan interest begins to phaseout at $85,000 of AGI and you completely lose the deduction once your AGI is above $100,000. If you are married filing a joint tax return, the deduction begins to phaseout at $170,000 of AGI and it’s completely gone once your AGI hits $200,000.
Also the deduction is limited to $2,500.
However, even if you can deduct the interest on your student loan, the tax benefit is probably not as big as you think. Let me explain via an example. Take the following fact set:
Tax Filing Status: Single
Adjusted Gross Income (AGI): $50,000
Outstanding Student Loan Balance: $60,000
Interest Rate: 7% ($4,200 Per Year)
First, you are limited to deducting $2,500 of the $4,200 in student loan interest that you paid to the lender. At $50,000 of AGI your top federal tax bracket in 2025 is 22%. So that $2,500 equals $550 in actual tax savings ($2,500 x 22% = $550). If you want to get technical, taking the tax deduction into account, your after tax interest rate on your student loan debt is really 6.08% instead of 7%. Can you get a CD from a bank right now with a 6% interest rate? No. From both a debt reduction standpoint and a rate of return standpoint, it probably makes sense to pay down that loan more aggressively.
Striking A Balance
When you are younger, you typically have a lot of financial goals such as saving for retirement, paying off debt, saving for the down payment on your first house, starting a family, college savings for you kids, etc. While I'm sure you would like to take all of your extra income and really start aggressively reducing your student loans you have to determine what the right balance is between all of your financial goals. If you receive a $5,000 bonus from work, you may allocate $3,000 of that toward your student loan debt and deposit $2,000 in your savings account for the eventual down payment on your first house. One example being to create that "goal" column in your student loan spreadsheet will help you to keep that balance and eventually lead to the payoff of all of your student loans.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
The Marriage Penalty: Past and Present
Whether you're currently married or not, the new tax legislation may impact how the "Marriage Penalty" affects you. Never heard of such a thing? Let's take a look at a simple example and show how it may be different under the new tax regulation.
The Marriage Penalty: Past and Present
Whether you're currently married or not, the new tax legislation may impact how the "Marriage Penalty" affects you. Never heard of such a thing? Let's take a look at a simple example and show how it may be different under the new tax regulation.
The Past (kind of)
I say "kind of" because most people still have to file their 2017 tax return. Here is the 2017 tax table for Single Filers and Married Filing Joint Filers:
A reasonable person would think that the income subject to tax would simply double if you went from filing Single to Married Filing Joint. As you can see, this isn't the case once you are in the 25%+ tax bracket and it can mean big dollars! Let's take a look at a simple example where each person makes the same amount of money. We will also assume they will be taking the standard deduction in 2017.
Note: To calculate the “Federal Income Tax” amount above, you can use the IRS tables here 2017 1040 Tax Table Instructions. All of your income is not taxed at your top rate. For example, if your top income falls in the 25% tax bracket, as a single payer you will only pay 25% on income from $37,951 to $91,900. Everything below that range will be taxed at either 10% or 15%.
As you can see, because of the change in filing status, this couple owed a total of $771 more to the federal government. This is the “Marriage Penalty”. Typically as incomes rise, the dollar amount of the penalty becomes larger. For this couple, their top tax bracket went from 25% each when filing single to 28% filing joint.
The Present
Here is the 2018 tax table in the new tax legislation for Single Filers and Married Filing Joint Filers:
Upon review, you can see that the top income brackets are not doubled for Married Filing Joint. At 37%, a single person filing would reach the top rate at $500,001 while married filing joint would reach at $600,001. That being said, the “Marriage Penalty” appears to kick in at higher income levels compared to the past and therefore should impact less people. The income bracket for Married Filing Joint is doubled up until $400,000 of combined income compared to just $75,901 under the 2017 brackets.
Let’s take a look at the same couple in the example above.
Due to the income brackets doubling from single to married filing joint for this couple, the “Marriage Penalty” they would have incurred in 2017 appears to go away. In this example, they would also pay less in federal taxes in both situations. This article is more focused on the impact on the “Marriage Penalty” but having a lower tax bill is always a plus.
Standard vs. Itemized Deductions
The tax brackets aren’t the only penalty. Another common tax increase people see when going from single to married filing joint are the deductions they lose. If I’m single and own a home, it is likely I will itemized because the sum of my property taxes, mortgage interest, and state income taxes exceed the standard deduction amount. Assume the couple in the example above is still not married but Person 1 owns a home and rather than taking the standard deduction, Person 1 itemizes for an amount of $15,000. For 2017, their total deductions will be $21,350 ($15,000 Person 1 plus $6,350 Person 2) and for 2018, their total deductions will be $27,000 ($15,000 Person 1 plus $12,000 Person 2).
Now they get married and have to choose whether to itemize or take the standard deduction.
2017: Assuming they live together in the same house, in 2017 they would still itemize because they have deductions of $15,000 for Person 1 and some additional items that Person 2 would bring to the table (i.e. their state income taxes). Say their total itemized deductions are $18,000 when married filing joint. They would still itemize because $18,000 is more than the Married Filing Joint standard deduction of $12,700. But now compare the $18,000 to the $21,350 they got filing single. They lose out on $3,350 of deductions. Usually, less deductions equals more taxes.
2018: Assuming they live together in the same house, in 2018 they would no longer itemize. Assuming their total itemized deductions are still $18,000, that is less than the $24,000 standard deduction they can take when married filing joint. $24,000 standard deduction in 2018 is still less than the $27,000 they got filing separately by $3,000. Again, less deductions usually means more taxes. The “Marriage Penalty” lives on!
A lot of people will still lose out on deductions in 2018 but the “Marriage Penalty” will hit less people because of the increase in the standard deduction. If Person 1 has itemized deductions of $10,000 in 2017, they would itemize if they filed single and possibly take the standard deduction of $12,700 filing joint. In 2018 however, Person 1 would take the standard deduction both as a single tax payer ($12,000) and married filing joint ($24,000) which takes away the “Marriage Penalty” related to the deduction.
The Why?
Why do tax brackets work this way? Like most taxes, I assume the idea was to generate more income for the government. Some may also argue that typical couples don't make the same salaries which seems like an archaic point of view.Was it all fixed with the new tax legislation? It doesn't appear so but it does look like less people will be struck by Cupid's Marriage Penalty.
About Rob.........
Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.
More Taxpayers Will Qualify For The Child Tax Credit
There is great news for parents in the middle to upper income tax brackets in 2018. The new tax law dramatically increased the income phaseout threshold for claiming the child tax credit. In 2017, parents were eligible for a $1,000 tax credit for each child under the age of 17 as long as their adjusted gross income (“AGI”) was below $75,000 for single
There is great news for parents in the middle to upper income tax brackets. The new tax law dramatically increased the income phase-out threshold for claiming the child tax credit. In 2017, parents were eligible for a $1,000 tax credit for each child under the age of 17 as long as their adjusted gross income (“AGI”) was below $75,000 for single filers and $110,000 for married couples filing a joint return. If your AGI was above those amounts, the $1,000 credit was reduced by $50 for every $1,000 of income above those thresholds. In other words, the child tax credit completely phased out for a single filer with an AGI greater than $95,000 and for a married couple with an AGI greater than $130,000.
Note: If you are not sure what the amount of your AGI is, it’s the bottom line on the first page of your tax return (Form 1040).
New Phaseout Thresholds Beginning In 2018
Starting in 2018 and for years going forward, the new phaseout thresholds for the Child Tax Credit begin at the following AGI levels:
Single Filer: $200,000
Married Filing Joint: $400,000
If your AGI falls below these thresholds, you are eligible for the full Child Tax Credit. For taxpayers with an AGI amount that exceeds these thresholds, the phaseout calculation is the same as 2017. The credit is reduced by $50 for every $1,000 in income over the AGI threshold.
Wait......It Gets Better
Not only will more families now qualify for the child tax credit but the amount of the credit was doubled. The new tax law increased the credit from $1,000 to $2,000 for each child under the age of 17.
In 2025, a married couple, with three children, with an AGI of $200,000, would have received nothing for the child tax credit. Now, that same family will receive a $6,000 tax credit. That’s huge!! Remember, “tax credits” are more valuable than “tax deductions”. Tax credits reduce your tax liability dollar for dollar whereas tax deductions just reduce the amount of your income subject to taxation.
This information is for educational purposes only. Please consult your accountant for personal tax advice.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How Much Will Your Paycheck Increase In 2018?
U.S taxpayers have a big reason to celebrate this week. By the end of February, you should see your paycheck increase. The government released the new payroll withholding tables this week which will lower the amount of taxes withheld from your paycheck and increase your take home pay. Naturally the next question is "How much will my paycheck go
U.S taxpayers have a big reason to celebrate this week. By the end of February, you should see your paycheck increase. The government released the new payroll withholding tables this week which will lower the amount of taxes withheld from your paycheck and increase your take home pay. Naturally the next question is "How much will my paycheck go up?" Out of curiously, I spent my Saturday morning comparing the 2017 tax tables to the new 2018 tax tables to answer that question. Yes, this is what nerds do on their weekends.
The Calculation
Like most financial calculations, it's long and boring. I will provide you with the cliff notes version. The government provides your company with tax withholding tables that they enter into the payroll system. It tells your employer how much to withhold in fed taxes from each pay check. The three main variables in the calculation are:
Payroll frequency (weekly, bi-weekly, etc)
The number of withholding allowances that you claim
The amount of your pay
Single Filers or Head of Household
If you are a single or head of household tax filer, I ran the following calculations based on a bi-weekly payroll schedule and an employee claiming one withholding allowance. The table below illustrates how much your annual take home pay may increase under the new tax withholding tables at various salary levels.
withholding tables - single filer
Based on this analysis, it looks like a single filer’s paycheck will increase between 2% – 3% as soon as the new withholding tables are entered into the payroll system. If you want to know how much your bi-weekly pay will increase, just take the annual numbers listed above and divide them by 26 pay periods. If the payroll frequency at your company is something other than bi-weekly or you claim more than one withholding allowance, your percentage increase in take home pay will deviate from the table listed above.
Married Couples Filing Joint
For employees that are married and file a joint tax return, below is the calculations based on a bi-weekly payroll schedule and two withholding allowances. The table below illustrates how much your annual take home pay may increase under the new tax withholding tables at various salary levels.
payroll tax withholding table - married
Even though I added an additional withholding allowance in the calculation for the married employee, I was surprised that the “range” of the percentage increase in the take home pay for a married employee was noticeably wider than a single tax filer. As you will see in the table above, the increase in take home pay for an employee in this category range from 1.5% – 3.1%.
Another interesting observation, in the single filer table, the percentage increase in take home pay actually diminished as the employee’s annual compensation increased. In contrast, for the married employee, the percentage increase in annual take home pay gradually increased as the employee’s annual salary increased. Conclusion…..get married in 2018? Nothing says love like new withholding tables.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
How Much Will The Value Of Your House Drop Under The New Tax Law?
It's not a secret to anyone at this point that the new tax bill is going to inflict some pain on the U.S. housing market in 2018. The questions that most homeowners and real estate investors are asking is: "How much are home prices likely to decrease within the next year due to the tax changes?" The new $10,000 limitation on SALT deductions, the lower
It's not a secret to anyone at this point that the new tax bill is going to inflict some pain on the U.S. housing market in 2018. The questions that most homeowners and real estate investors are asking is: "How much are home prices likely to decrease within the next year due to the tax changes?" The new $10,000 limitation on SALT deductions, the lower deduction cap mortgages interest, and the higher standard deduction are all lining up to take a bite out of real estate prices. The size of the bite will largely depend on where you live and the value of your house.
3 Bites That Will Hurt
The Trump tax reform made three significant changes to the tax laws that will impact housing prices:
Capped state and local tax ("SALT") deductions at $10,000 (includes property taxes)
Lowered the deduction cap on the first $750,000 of a mortgage
Doubled the standard deduction
The New Standard Deduction
There is a reason why I'm starting this analysis with the doubling of the standard deduction in 2018. For many households in the U.S., the doubling of the standard deduction will make the cap on the SALT deductions irrelevant. Let me explain. Below is a comparison of the standard deduction limits in 2017 versus 2018:
new standard deduction
In 2018, a married couple filing a joint tax return would need over $24,000 in itemized deductions to justify not taking the standard deduction and calling it a day. For a married couple, both W-2 employees, $7,000 in property taxes, $9,000 in state income taxes, if those are their only itemized deductions, then it will most likely makes sense for them to take the $24,000 standard deduction. So the $10,000 cap on property taxes and state income taxes becomes irrelevant because it’s an itemized deduction. This will be a big change for many U.S. households. In 2017, that same family may have itemized because their property and state taxes exceeded the $12,700 standard deduction threshold.
For taxpayers age 65 and older, the new tax law kept the additional standard deduction amounts: $1,250 for single filers and $2,500 for married filing joint which are over and above the normal limits.
$10,000 Cap On State & Local Taxes
Starting in 2018, taxpayers are limited to a $10,000 deduction for a combination of their property taxes, school taxes, and state & local income tax. For states that have both high property taxes and high income taxes like New York, New Jersey, and California, homeowners will most likely be looking at a larger decrease in the value of their homes versus states like Florida that have lower property taxes and no state income taxes. The houses with the higher dollar value may experience a larger drop in price.
If you live in a $200,000 house, the property / school taxes are $5,000, and you decided to sell your house, the family looking to buy your house may already be planning on taking the $24,000 standard deduction at that income level, so the new tax cap would not really decrease the “value” of the house to the potential buyer.
On the flip side, if you own a $600,000 house, your property/school taxes are $18,000, and you are looking to sell your house, the new $10,000 cap will most likely have a negative impact on the value of your house. As you might assume, the individuals and families with the higher incomes that could afford to purchase a $600,000 house will naturally be the homeowners that will continue to itemize their deduction in 2018. So owning that $600K house in 2018 comes at an additional annual cost to the buyer because they lose $8,000 in property tax deductions. For individuals and families in the top federal tax bracket (37%), the cost to live in that house just went up by $3,120 per year. I have personally already had two clients call me that just purchased a house in 2017 with property taxes above the $10,000 cap and they said “I might not have purchased this big of a house if I knew I was not going to be able to deduct all of the property taxes”.
$750,000 Deduction Cap On Mortgages
Prior to 2018, taxpayers could only deduct interest on the first $1,000,000 of a mortgage. For all new mortgages, beginning in 2018, the cap was reduced from $1,000,000 to $750,000. The new tax law grandfathered the $1M cap for mortgages that were already in existence prior to December 31, 2017. Obviously this change will only impact very high income earning individuals and families living in houses valued at $1M+ but it still may have a negative impact on the prices of those big houses. I say "may" because if you can afford a $3M condo in Manhattan, you may not care that you lost a $7,500 tax deduction.
It Depends Where You Live
Given these changes to tax law, it seems likely that the states with higher property taxes and higher home values will be the most vulnerable to price adjustments. Below is a map, from Zillow and Credit Suisse, showing the median home price by state:
median home price
Let's also locate the states that have a high concentration of mortgages over $500,000. As mentioned above, this may put price pressure on homeowners trying to sell houses above the new $750,000 mortgage interest deduction threshold:
states with high mortgages
And the "Non-Winners" are New York, California, and New Jersey. Moody's published a list of the 25 counties that are expect to lose the largest percentage of value. Note, that only six of those counties are located outside of New York or New Jersey:
tax reform impact on housing prices
To bring it all together, Moody's and FHFA published the illustration below showing the percentage change in the Federal Housing Finance Agency – House Price Index as a result of the new tax bill:
house price decline
It's safe to assume that geographically, the negative impact that the new tax rules will have on the U.S. house market will occur in concentrated pockets as opposed to a widespread reduction in housing prices across the country.
Do Not Move To Alaska Just Yet!!
Before you show the chart above to your family at dinner tonight with a “Go Alaska” hat on, I urge you to read on. (Disclosure, I have nothing against Alaska. I was born in Fairbanks, Alaska) If you live in one of the “red spots” on the heat map above or in one of the counties in the list of “where home prices could stall after tax reform”, the charts above do not necessarily mean that at the end of 2018 your house is going to be worth 5% less than it was at the beginning of 2018. Moody’s has done the comparison of the tax bill passing versus no tax bill. If prior to the tax bill being passed it was estimated in 2018 that homes in your area were going to increase in value by 5% and the heat map above shows a 4% drop as a result of tax reform, then that means instead the value of your home growing by 5% it may only grow by 1%.
As with any forecast, it’s anyone’s guess at this point how the math will actually work itself out but in general I think it will be more positive than the consensus expects.
House Values Under $250,000 – Status Quo
Given the changes to the tax law, if you live in a house that is valued under $250,000, regardless of where you live, the downward pressure on the price of your house as a result of tax reform should be minimal. Why? Most buyers in this range will most likely be electing the standard deduction anyways so the new $10,000 cap on SALT deductions should have little to no impact. This should even be true for states that have high property taxes because the homeowners would need over $24,000 in itemized deductions before the $10,000 cap would potentially hurt them tax wise.
The Sandwich: House Values $250,000 - $750,000
The homeowners at the highest risk of a reduction in the value of their house are located in what I call “The Sandwich”. They have a house that is valued somewhere between $250,000 – $750,000 and they live in a high property tax state. While Congress touts that the doubling of the standard deduction is a “fix all” for all of the tax deductions that have been taken away, it’s unfortunately not. There are a number of individuals and families that are in the income range customarily associated with buying a $250K – $750K house that may actually pay more in taxes under the new rules.
Taxpayers in this group are also moving from their “starter house” in their first “big house”. Unlike the super wealthy that may care less about paying an extra $5,000 in taxes per year, for an upper middle class family that has kids, that is saving for college, and contributing to 401(k) plans, the loss of that tax benefit may mean they can’t take a family vacation if they buy that bigger house. Less buyers in the market for houses in this “Sandwich” range translates to lower prices.
How much lower? Probably nothing dramatic in the short term because the U.S. economy is doing so well. When the economy is growing, people feel secure in their jobs, wages are going up, workers are getting bonuses, and that provides them with the additional income needed to make that larger mortgage payment and pay a little more in taxes.
My concern would be for someone that is planning to purchase a house and then sell within the next 5 years. If the economy goes into a recession, people start losing their jobs, and the U.S. consumer starts look for more ways to stretch their dollars, the homeowners that stretched themselves to buy the bigger house based on the big bonus that they received when the economy was humming are at a big risk of losing their house. In addition, there may be fewer buyers in the market because families may not want to waste money on property taxes that they can’t deduct.
The Millionaire Club: House Values $750,000+
It would seem that houses in the $750,000+ range have the most lose to for two reasons. First, homeowners in this category pay the highest property taxes and they are typically not electing the standard deduction at this income level. Second, home buyers at this price point would also be negatively impacted by the lower $750,000 cap on the mortgage interest deduction.
But I doubt this will be the case. Why? There is only so much lake front property. If you make over $5M per year and you fall in love with a lake house in upstate New York that has a $1.5M price tag, while you could try to find a similar lake house in a more tax friendly state, if you make $5M per year, what’s another $15,000 in expenses for buy your first choice.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Will Home Equity Loan Interest Be Deductible In 2019+?
The answer............it depends. It depends on what you used or are going to use the home equity loan for. Up until the end of 2017, borrowers could deduct interest on home equity loans or homes equity lines of credit up to $100,000. Unfortunately, many homeowners will lose this deduction under the new tax law that takes effect January 1, 2018.
The answer............it depends. It depends on what you used or are going to use the home equity loan for. Up until the end of 2017, borrowers could deduct interest on home equity loans or homes equity lines of credit up to $100,000. Unfortunately, many homeowners will lose this deduction under the new tax law that takes effect January 1, 2018.
Old Rules
Taxpayers used to be able to take a home equity loan or tap into a home equity line of credit, spend the money on whatever they wanted (pool, college tuition, boat, debt consolidation) and the interest on the loan was tax deductible. For borrowers in higher tax brackets this was a huge advantage. For a taxpayer in the 39% fed tax bracket, if the interest rate on the home equity loan was 3%, their after tax interest rate was really 1.83%. This provided taxpayers with easy access to cheap money.
The Rules Are Changing In 2018
To help pay for the new tax cuts, Congress had to find ways to bridge the funding gap. In other words, in order for some new tax toys to be given, other tax toys needed to be taken away. One of those toys that landed in the donation box was the ability to deduct the interest on home equity loans and home equity lines of credit. But all may not be lost. The tax law splits "qualified residence interest" into two categories:
Acquisition Indebtedness
Home Equity Indebtedness
Whether or not your home equity loan or HELOC is considered acquisition indebtedness or home equity indebtedness may ultimately determine whether or not the interest on that loan will continue to be deductible in 2018 and future years under the new tax rules. I say "may" because we need additional guidance form the IRS as to how the language in the tax bill will be applied in the real world. As of right now you have some tax professionals stating that all interest from homes equity sources will be disallowed beginning in 2018 and other tax professionals taking the position that home equity loans from acquisition indebtedness will continue to be eligible for the tax deduction in 2018. For the purpose of this article, we will assume that the IRS will continue to allow the deduction of interest on home equity loans and HELOCs associated with acquisition indebtedness.
Acquisition Indebtedness
Acquisition indebtedness is defined as “indebtedness that is secured by the residence and that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer”. It seems likely, under this definition, if you took out a home equity loan to build an addition on your house, that would be classified as a “substantial improvement” and you would be able to continue to deduct the interest on that home equity loan in 2018. Where we need help from the IRS is further clarification on the definition of “substantial improvement”. Is it any project associated with the house that arguably increases the value of the property?
More good news, this ability to deduct interest on home equity loans and HELOCs for debt that qualifies as “acquisition indebtedness” is not just for loans that were already issued prior to December 31, 2017 but also for new loans.
Home Equity Indebtedness
Home equity indebtedness is debt incurred and secured by the residence that is used for items that do not qualify as "acquisition indebtedness". Basically everything else. So beginning in 2018, interest on home equity loans and HELOC's classified as "home equity indebtedness" will not be tax deductible.
No Grandfathering
Unfortunately for taxpayers that already have home equity loans and HELOCs outstanding, the Trump tax reform did not grandfather the deduction of interest for existing loans. For example, if you took a home equity loan in 2016 for $20,000 and there is still a $10,000 balance on the loan, you will be able to deduct the interest that you paid in 2017 but beginning in 2018, the deduction will be lost if it does not qualify as "acquisition indebtedness".
Partial Deduction
An important follow-up question that I have received from clients is: “what if I took a home equity loan for $50,000, I used $30,000 to renovate my kitchen, but I used $20,000 as a tuition payment for my daughter? Do I lose the deduction on the full outstanding balance of the loan because it was not used 100% for substantial improvements to the house? Great question. Again, we need more clarification on this topic from the IRS but it would seem that you would be allowed to take a deduction of the interest for the portion of the loan that qualifies as “acquisition indebtedness” but you would not be able to deduct the interest attributed to the “non-acquisition or home equity indebtedness”.
Time out……how do you even go about calculating that if it’s all one loan? Even if I can calculate it, how is the IRS going to know what portion of the interest is attributed to the kitchen project and which portion is attributed to the tuition payment? More great questions and we don’t have answers to them right now. These are the types of issues that arise when you rush major tax reform through Congress and then you make it effective immediately. There is a laundry list of unanswered questions and we just have to wait for clarification on from the IRS.
Itemized Deduction
An important note about the deduction of interest on a home equity loan or HELOC, it's an itemized deduction. You have to itemize in order to capture the tax benefit. Since the new tax rules eliminated or limited many of the itemized deductions available to taxpayers and increased the standard deduction to $12,000 for single filers and $24,000 for married filing joint, many taxpayers who previously itemized will elect the standard deduction for the first time in 2018. In other word, regardless of whether or not the IRS allows the deduction for home equity loan interest assigned to acquisition indebtedness, very few taxpayers will reap the benefits of that tax deduction because your itemized deductions would need to exceed the standard deduction thresholds before you would elect to itemize.
Will This Crush The Home Equity Loan Market?
My friends in the banking industry have already started to ask me, “what impact do you think the new tax rules will have on the home equity loan market as a whole?” It obviously doesn’t help but at the same time I don’t think it will deter most homeowners from accessing home equity indebtedness. Why? Even without the deduction, home equity will likely remain one of the cheapest ways to borrow money. Typically the interest rate on home equity loans and HELOCs are lower because the loan is secured by the value of your house. Personal loans, which typically have no collateral, are a larger risk to the lender, so they charge a higher interest rate for those loans.
Also, for most families in the United States, the primary residence is their largest asset. A middle class family may not have access to a $50,000 unsecured personal loan but if they have been paying down their mortgage for the past 15 years, they may have $100,000 in equity in their house. With the cost of college going up and financial aid going down, for many families, accessing home equity via a loan or a line of credit may be the only viable option to help bridge the college funding gap.
About Michael.........
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
