Salal Credit Union

Investment Services Newsletters

Salal Investment Services Newsletter, First Quarter 2018

photo of Adrian Hedwig

Adrian A. Hedwig

Financial Advisor, CUSO Financial Services, L.P.
Available at all Salal Credit Union branches
P: 206.607.3481
F. 206.298.3492
adrianh.cfsinvest@salalcu.org

Request an Appointment

 

Tax Reform: How will you be affected?

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package that fundamentally changes the individual and business tax landscape. While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.

Individual income tax rates

The legislation replaces most of the seven current marginal income tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) with corresponding lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The legislation also establishes new marginal income tax brackets for estates and trusts, and replaces existing “kiddie tax” provisions (under which a child’s unearned income is taxed at his or her parents’ tax rate) by effectively taxing a child’s unearned income using the estate and trust rates.

Filing as Single

If taxable income is:

Then income tax equals:

Not over $9,52510% of the taxable income
Over $9,525 but not over $38,700$952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500$4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500$14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000$32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000$45,689.50 plus 35% of the excess over $200,000
Over $500,000$150,689.50 plus 37% of the excess over $500,000

 

Head of Household

If taxable income is:

Then income tax equals:

Not over $13,60010% of the taxable income
Over $13,600 but not over $51,800$1,360 plus 12% of the excess over $13,600
Over $51,800 but not over $82,500$5,944 plus 22% of the excess over $51,800
Over $82,500 but not over $157,500$12,698 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000$30,698 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000$44,298 plus 35% of the excess over $200,000
Over $500,000$149,298 plus 37% of the excess over $500,000

 

Married Individuals Filing Joint Returns

If taxable income is:

Then income tax equals:

Not over $19,05010% of the taxable income
Over $19,050 but not over $77,400$1,905 plus 12% of the excess over $19,050
Over $77,400 but not over $165,000$8,907 plus 22% of the excess over $77,400
Over $165,000 but not over $315,000$28,179 plus 24% of the excess over $165,000
Over $315,000 but not over $400,000$64,179 plus 32% of the excess over $315,000
Over $400,000 but not over $600,000$91,379 plus 35% of the excess over $400,000
Over $600,000$161,379 plus 37% of the excess over $600,000

Married Individuals Filing Separate Returns

If taxable income is:

Then income tax equals:

Not over $9,52510% of the taxable income
Over $9,525 but not over $38,700$952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500$4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500$14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000$32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $300,000$45,689.50 plus 35% of the excess over $200,000
Over $300,000$80,689.50 plus 37% of the excess over $300,000

 

Standard deduction and personal exemptions

The legislation roughly doubles existing standard deduction amounts, but repeals the deduction for personal exemptions. Additional standard deduction amounts allowed for the elderly and the blind are not affected by the legislation and will remain available for those who qualify. Higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward.

2018 Standard Deduction Amounts

Filing Status

Before Tax Cuts and Jobs Act

After Tax Cuts and Jobs Act

Single or Married Filing Separately$6,500$12,000
Head of Household$9,550$18,000
Married Filing Jointly$13,000$24,000

Itemized deductions

The overall limit on itemized deductions that applied to higher-income taxpayers (commonly known as the “Pease limitation”) is repealed, and the following changes are made to individual deductions:

  • State and local taxes — Individuals are only able to claim an itemized deduction of up to $10,000 ($5,000 if married filing a separate return) for state and local property taxes and state and local income taxes (or sales taxes in lieu of income).
  • Home mortgage interest deduction — Individuals can deduct mortgage interest on no more than $750,000 ($375,000 for married individuals filing separately) of qualifying mortgage debt. For mortgage debt incurred prior to December 16, 2017, the prior $1 million limit will continue to apply. No deduction is allowed for interest on home equity indebtedness.
  • Medical expenses — The adjusted gross income (AGI) threshold for deducting unreimbursed medical expenses is retroactively reduced from 10% to 7.5% for tax years 2017 and 2018, after which it returns to 10%. The 7.5% AGI threshold applies for purposes of calculating the alternative minimum tax (AMT) for the two years as well.
  • Charitable contributions — The top adjusted gross income (AGI) limitation percentage that applies to deducting certain cash gifts is increased from 50% to 60%.
  • Casualty and theft losses — The deduction for personal casualty and theft losses is eliminated, except for casualty losses suffered in a federal disaster area.
  • Miscellaneous itemized deductions — Miscellaneous itemized deductions that would be subject to the 2% AGI threshold, including tax-preparation expenses and unreimbursed employee business expenses, are no longer deductible.

Child tax credit

The child tax credit is doubled from $1,000 to $2,000 for each qualifying child under the age of 17. The maximum amount of the credit that may be refunded is $1,400 per qualifying child, and the earned income threshold for refundability falls from $3,000 to $2,500 (allowing those with lower earned incomes to receive more of the refundable credit). The income level at which the credit begins to phase out is significantly increased to $400,000 for married couples filing jointly and $200,000 for all other filers. The credit will not be allowed unless a Social Security number is provided for each qualifying child.

A new $500 nonrefundable credit is available for qualifying dependents who are not qualifying children under age 17.

Alternative minimum tax (AMT)

The AMT is essentially a separate, parallel federal income tax system with its own rates and rules — for example, the AMT effectively disallows a number of itemized deductions, as well as the standard deduction. The legislation significantly narrows the application of the AMT by increasing AMT exemption amounts and dramatically increasing the income threshold at which the exemptions begin to phase out.

2018 AMT Exemption Amounts

Filing Status

Before Tax Cuts and Jobs Act

After Tax Cuts and Jobs Act

Single or Head of Household$55,400$70,300
Married Filing Jointly$86,200$109,400
Married Filing Separately$43,100$54,700

 

2018 AMT Exemption Phaseout Thresholds

Filing Status

Before Tax Cuts and Jobs Act

After  Tax Cuts and Jobs Act

Single or Head of Household$123,100$500,000
Married Filing Jointly$164,100$1,000,000
Married Filing Separately$82,050$500,000

Other noteworthy changes

  • The Affordable Care Act individual responsibility payment (the penalty for failing to have adequate health insurance coverage) is permanently repealed starting in 2019.
  • Application of the federal estate and gift tax is narrowed by doubling the estate and gift tax exemption amount to about $11.2 million in 2018, with inflation adjustments in following years.
  • In a permanent change that starts in 2018, Roth conversions cannot be reversed by recharacterizing the conversion as a traditional IRA contribution by the return due date.
  • For divorce or separation agreements executed after December 31, 2018 (or modified after that date to specifically apply this provision), alimony and separate maintenance payments are not deductible by the paying spouse, and are not included in the income of the recipient. This is also a permanent change.

Key Retirement and Tax Numbers for 2018

Every year, the Internal Revenue Service announces cost-of-living adjustments that affect contribution limits for retirement plans, thresholds for deductions and credits, and standard deduction and personal exemption amounts. Here are a few of the key adjustments for 2018.*

Employer retirement plans 

  • Employees who participate in 401(k), 403(b), and most 457 plans can defer up to $18,500 in compensation in 2018 (up from $18,000 in 2017); employees age 50 and older can defer up to an additional $6,000 in 2018 (the same as in 2017).
  • Employees participating in a SIMPLE retirement plan can defer up to $12,500 in 2018 (the same as in 2017), and employees age 50 and older can defer up to an additional $3,000 in 2018 (the same as in 2017).

IRAs

The limit on annual contributions to an IRA remains unchanged at $5,500 in 2018, with individuals age 50 and older able to contribute an additional $1,000. For individuals who are covered by a workplace retirement plan, the deduction for contributions to a traditional IRA is phased out for the following modified adjusted gross income (AGI) ranges:

2017

2018

Single/head of household (HOH)$62,000 – $72,000$63,000 – $73,000
Married filing jointly (MFJ)$99,000 – $119,000$101,000 – $121,000
Married filing separately (MFS)$0 – $10,000$0 – $10,000

The 2018 phaseout range is $189,000 – $199,000 (up from $186,000 – $196,000 in 2017) when the individual making the IRA contribution is not covered by a workplace retirement plan but is filing jointly with a spouse who is covered.

The modified AGI phaseout ranges for individuals to make contributions to a Roth IRA are:

2017

2018

Single/HOH$118,000 – $133,000$120,000 – $135,000
MFJ$186,000 – $196,000$189,000 – $199,000
MFS$0 – $10,000$0 – $10,000

Estate and gift tax

  • The annual gift tax exclusion for 2018 is $15,000, up from $14,000 in 2017.
  • The gift and estate tax basic exclusion amount for 2018 is $11,200,000, up from $5,490,000 in 2017.

Personal exemption

There is no personal exemption amount for 2018; it was $4,050 in 2017. For 2018, there is no phaseout of personal exemptions or overall limit on itemized deductions once AGI exceeds certain thresholds.

For 2017, personal exemptions were phased out and itemized deductions were limited once AGI exceeded $261,500 (single), $287,650 (HOH), $313,800 (MFJ), or $156,900 (MFS).

Standard deduction

2017

2018

Single$6,350$12,000
HOH$9,350$18,000
MFJ$12,700$24,000
MFS$6,350$12,000

The additional standard deduction amount for the blind or aged (age 65 or older) in 2018 is $1,600 (up from $1,550 in 2017) for single/HOH or $1,300 (up from $1,250 in 2017) for all other filing statuses. Special rules apply if you can be claimed as a dependent by another taxpayer.

Alternative minimum tax (AMT)

2017

2018

Maximum AMT exemption amount
Single/HOH$54,300$70,300
MFJ$84,500$109,400
MFS$42,250$54,700
Exemption phaseout threshold
Single/HOH$120,700$500,000
MFJ$160,900$1,000,000
MFS$80,450$500,000
26% rate on AMTI* up to this amount, 28% rate on AMTI above this amount
MFS$93,900$95,750
All others$187,800$191,500
*Alternative minimum taxable income

 


 

Questions to Ask Before Buying That Thing You’ve Always Wanted

Even if you’re generally comfortable with your finances, you may occasionally worry about how much you’re spending, especially if you consistently have trouble saving for short- or long-term goals. Here are a few questions to ask that might help you decide whether a purchase is really worth it.

Why do I want it?

Maybe you’ve worked hard and think you deserve to buy something you’ve always wanted. That may be true, but are you certain you’re not being unduly influenced by other factors such as stress or boredom?

Take a moment to think about what’s important to you. Comfort? Security? Safety? Status? Quality? Thriftiness? Does your purchase align with your values, or are you unconsciously allowing other people (advertisers, friends, family, neighbors, for example) to influence your spending?

How will buying this now affect me later?

When you’re deciding whether to buy something, you usually focus on the features and benefits of what you’re getting, but what are you potentially forgoing? When you factor this into your decision, what you’re weighing is known as the opportunity cost. For example, let’s say you’re trying to decide whether to buy a new car. If you buy the car, will you have to give up this year’s family vacation to Disney World? Considering the opportunity cost may help you evaluate both the direct and indirect costs of a purchase. Ask yourself how you will feel about your purchase later. Tomorrow? Next month? Next year?

Will this purchase affect your family?

Couples often fight about money because they have conflicting money values. Will your spouse or partner object to your purchasing decision? And what about your children? Children learn from what they observe. Are you comfortable with the example you might be setting?

Do I really need it today?

Buying something can be instantly and tangibly gratifying. After all, which sounds more exciting: spending $1,500 on the ultra-light laptop you’ve had your eye on or putting that money into a retirement account? Consistently prioritizing an immediate reward over a longer-term goal is one of the biggest obstacles to saving and investing for the future. The smaller purchases you make today could be getting in the way of accumulating what you’ll need 10, 20, or 30 years down the road.

Be especially wary if you’re buying something now because “it’s such a good deal.” Take time to find out whether that’s really true. Shop around to see that you’re getting the best price, and weigh alternatives. You may discover a lower-cost product that will meet your needs just as well. If you think before you spend money, you may be less likely to make impulse purchases and more certain that you’re making appropriate financial choices.

Can I really afford it?

Whether you can afford something depends on both your income and your expenses. You should know how these two things measure up before making a purchase. Are you consistently charging purchases to your credit card and carrying that debt from month to month? If so, this may be a warning sign that you’re overspending. Reexamining your budget and financial priorities may help you get your spending back on track.


IMPORTANT DISCLOSURES:
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The credit union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Prepared for Salal Investment Services by Broadridge Investor Communication Solutions, Inc. Copyright 2017.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. This communication is strictly intended for individuals residing in the state(s) of WA. No offers may be made or accepted from any resident outside the specific states referenced.