Savings Strategies with the New Tax Law

Savings Strategies With the New Tax Law

The sweeping tax overhaul signed in December 2017 makes big changes to tax rates and deductions. Understanding the changing rules can help you make the most of new opportunities and apply strategies to improve your financial situation.

Lower tax brackets and retirement-savings strategies. You can continue to contribute up to $18,500 to a 457 plan and up to $5,500 to an IRA in 2018 (or $24,500 and $6,500 if you're age 50 or older). And, in most cases you still get the choice of getting a tax break now or later. You can make pre-tax contributions to a 457 plan now, then pay taxes on the withdrawals in retirement. (You may also be eligible to make tax-deductible IRA contributions, depending on your income.) Or, you may be able to make Roth IRA or Roth 457 contributions (if your employer's plan offers this option) with after-tax dollars, forgoing the immediate gratification of a tax break now in exchange for the ability to take withdrawals tax-free in retirement.

Because the new tax law reduces most tax rates until at least 2025, taking the Roth route may be more attractive to many workers, particularly those relatively early in their career.

You can contribute the full amount to a Roth IRA if your income is below $120,000 if you're single or $189,000 if you're married and file a joint return. You can make a partial contribution unless your income is above $135,000 for singles or $199,000 for married couples. You can withdraw Roth IRA contributions without penalties or taxes at any time.

There's no income limit for making Roth 457 contributions. If the tax cut that went into effect Jan. 1 increased your take-home pay, consider adding some of the extra money to your retirement savings.

Changes to deductions. A couple of deductions threatened with extinction during the tax debate survived, and one was actually sweetened. You can still deduct up to $2,500 per year in student-loan interest, even if you don't itemize deductions. And for both 2017 and 2018, unreimbursed medical expenses can be deducted to the extent they exceed 7.5 percent of adjusted gross income. (The old law set a 10 percent threshold.) But you can no longer deduct moving expenses, unless you're in the military, and you can't deduct interest on home-equity loans unless the money is used for home improvements. (This change applies to loans taken out before the law was passed as well as afterward.) The new law nearly doubles the standard deduction to $12,000 for single filers, $18,000 for head-of-household filers, and $24,000 for married couples filing jointly. For millions of taxpayers who have itemized in the past, this change will mean they'll claim the standard deduction starting with 2018 returns, especially now that some itemized deductions are limited (such as a $10,000 cap for state and local taxes, including property, income, and sales taxes).

New rules for education savings. If you have children, it has generally been a smart move to save for college in a tax-favored 529 college-savings plan. Most states give their residents a state income tax break for contributions (see for details), and you can withdraw both contributions and earnings tax-free for college tuition, room and board, and fees. The new tax law also allows tax-free withdrawals to pay tuition for kindergarten through 12th grade starting in 2018. Up to $10,000 per student per year can be withdrawn for this purpose.

Most of the new tax laws take effect with the 2018 tax year. For more information about the changes, see the New Tax Law section of


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