Whitefield Academy Blog
The New Tax Law: How It Will Affect Your Family
If you pay any attention to the news you are probably aware that Congress is working on major changes to the tax law. Regardless of your opinions about these changes, they are almost sure to affect you and because of the changes, you might want to change the way you give to charitable organizations and save for private school costs. I am not a tax professional, but I do work in the finance industry and I have been following the new tax legislation closely. Before the new law goes into effect (it is very likely to pass this week and be effective January 1, 2018), I wanted to try to explain some of the changes that will most likely affect Whitefield parents. I’m going to try to do this in a way that is easy to understand, and I’m not going to spend much time explaining changes that we can’t really do anything about. I’m also not going to share my opinion on the law, at least not on this blog!
If you give money to your church and other charitable groups (donations, but not tuition and fees, to schools like Whitefield qualify) you can reduce your taxable income by this amount, resulting in lower taxes. This is an example of an itemized deduction; other common itemized deductions include mortgage interest, property tax, and state income tax. When you file your taxes, these deductions are added up and subtracted from your taxable income. If this amount is less than what is called the standard deduction, however, then you would simply deduct the standard deduction. Currently the standard deduction is $6,350 for single taxpayers and $12,700 for married taxpayers filing jointly. Most Americans take the standard deduction, but middle-class people who make significant charitable contributions (such as church offerings) are likely to reach the current standard deduction when these are added to things like mortgage interest and property tax.
A major part of the new legislation is that the standard deduction will nearly double ($12,000 for singles and $24,000 for married taxpayers filing jointly). As a result, many middle-class people who have been itemizing their deductions will find that they will now take the standard deduction since their itemized deductions do not exceed the standard deduction. This means that for these people there is no tax benefit to making charitable contributions. Of course, that’s not the reason most people make these contributions, but these people might benefit from changing the timing of their donations. People who are itemizing deductions for 2017, and were planning on making significant charitable contributions in 2018 or later, but probably will not itemize in 2018 (because of the increase in the standard deduction), will benefit from “front-loading” those contributions into 2017 if they can. That was a long sentence so here’s a list.
- Will itemize deductions for 2017 (i.e., you filed a Schedule A in 2016)
- Won’t itemize deductions for 2018 (the amount you could put on Schedule A for 2018 is less than $12,000 if single or $24,000 if married)
- Are planning to donate money in 2018, but could donate it in 2017
then you should go ahead and “front-load” donations into 2017. In order to do that, you have to actually give your donation to the charity before January 1, 2018 (no back-dating is allowed).
529 Savings Accounts
529 savings accounts are currently used to avoid paying taxes on investment earnings, as long as that money is used for college expenses. Some financial advisers recommend families first take advantage of Roth 401k and IRA accounts before considering 529 accounts, but there are limits to the amounts that can be contributed to these accounts.
The new law will expand 529 accounts to be used for private K-12 schools (like Whitefield) in addition to college. This might seem like a big benefit for parents at schools like Whitefield, and in some cases it might be. Parents should remember, however, that the advantage to using a 529 account is to save taxes on investment earnings. So if you are saving for college, you should leave that money in the 529 account as long as possible to accrue investment earnings before it’s needed for college, rather than using it for K-12 school tuition.
The change to 529 accounts will be most beneficial to parents with money invested that will eventually be used for tuition, rather than parents who are paying tuition out of their paychecks year-to-year. 529s can be set up for any designated beneficiary, such as one’s grandchildren. So if you have money set aside for someone else, such as your grandchild’s K-12 tuition (God bless you!), you also might benefit from putting this money in a 529 account.
Child Tax Credit
The last change to tax law I’ll mention is the child tax credit. I said I’d focus on tax changes that you can do something about, and hey, this is not an exception. There is no limit to the number of children who can be eligible for the child tax credit. The number of children used to determine the child tax credit each year is based on the number in the household on January 1st, so if you are hoping to take more child tax credits, you should plan on conceiving by sometime in March. Just being practical here.
A tax credit differs from the deductions I mentioned earlier in that the credit is subtracted from your total tax amount rather than deducted from your taxable income. This makes a tax credit much more beneficial than a deduction of the same amount. The first change to the child tax credit is that it will be doubled from $1,000 to $2,000 per child. Another change is likely to affect lower-income households. Because the credit is deducted from taxes, currently those who pay no federal income tax (even if they do pay Social Security and other payroll taxes) do not receive any benefit, but under the new law these families will receive up to $1,400 as a refund. A third change will help higher-income households. Currently the income threshold to take the full credit is $75,000 for single filers and $110,000 for those filing jointly, but under the new law those thresholds will be $200,000 and $400,000, respectively.