As you all probably know, a new tax law was enacted toward the end of December 2017 and took effect in 2018. There are some fundamental changes that will change how we see taxes, and they will affect the economy and decisions we make. We have all been talking about the ability to save money with 529 accounts. There is another part of the law, however, that has a far bigger effect on the frum community – and that is the ability to deduct charity. I’m not sure why we are not hearing more talk in the community regarding this one.

*  *  *

What is income tax? What are tax deductions? How does it all work? Let’s review the basics of the old law. Step one: You add up your income. Step two: You deduct either a standard amount or your itemized list. Step three: You deduct (approximately) $4,000 for each person in the family. The result was your “taxable income.” You then paid a percentage of your taxable income in tax.

What changed: In the new law, you do not get to claim dependents. Kids are history – well, not exactly. In lieu of deductions for dependents, you get a child tax credit of $2,000 per child under 17 and $500 for other dependents.

Now let’s look at itemized deductions. The itemized deductions are: 1) medical expenses over 7.5% of your income, 2) real estate taxes, 3) state income taxes, 4) mortgage interest, and 5) charity. If the sum of these totals more than the standard deduction, you would claim the total instead of the standard deduction. That is called “itemizing.” Bottom line is that when people owned a house they generally itemized. Even a few non-home owners itemized if they had high state taxes and high charity.

You do not get to claim both the standard and the itemized deduction. It is one or the other. Obviously, you should itemize if it is higher. But if your itemized list is lower than the standard deduction, then you claim that. Now, here’s the important part: In the past, it was not hard to exceed the $12,600 standard deduction. The new law, however, is a whole different ballgame. The new law increased the standard deduction to $24,000. And, although the items included in your itemized deductions generally stay the same, state income taxes and real estate taxes combined cannot be more then $10,000. Ouch!

For those following current events in the community, there was a recent “event” concerning 529 accounts. I suspect, however, that some of you are still a bit confused. Let’s explain it, starting from the beginning.

Once upon a time, college was not expensive. Colleges kept their costs down. Their buildings were old (so old that they had ivy growing all over them – hence, the term Ivy League), and I guess the professors did not earn that much. Over the years, the price tag has risen considerably. Colleges discovered that they are big business.

The government heard about the problem with rising college tuition, and they came up with a solution: Save! Yep – start saving money when junior is a baby, and then you will have money when he’s ready to depart for the dorm. (See Genesis 41 regarding similar advice given to Pharaoh.) That seems simple enough. People would just put money in the bank or a stock brokerage and save up. But the government felt that people needed an incentive to save. So, true to form, they used income taxes to create the incentive. They passed a law that goes like this: If you save for college, all the earnings in that account are tax free. Let’s explain: Say you save $2,000 a year for 10 years. You have therefore put in $20,000. Typically, this money is invested in mutual funds that invest in the stock market, which may pay dividends and also go up in value. The account might therefore have grown and now has $30,000 in it. This money can now be used for college. However, if you withdraw the money and do not use it for college, the earnings of $10,000 are taxable (although the original $20,000 remains “your money”).

Many people are waiting with bated breath to find out what President Trump’s proposed tax reform will mean for them. While the law has not yet been voted into law, it looks like it might be. This makes this year’s tax planning especially tricky. While the new law would only affect 2018, not 2017, it affects what we should do before 2017 is over.

New Law Highlights

Let’s look, first, at the new law. There will be many changes, some of them with serious repercussions for the frum community.

Repeal of the alternative minimum tax: The repeal of the AMT is long overdue. It is confusing and unfair. It “caps” the amount of your tax deductions. Furthermore, it limits how many of your children are tax deductible. I would say that the repeal is “good for us” as it worked against people with large families.

I recently came across a question written by a young lady with a predicament that applies to many young couples. Here is her letter, followed by my advice:

My fiancé and I are in very different places financially. He is coming into the marriage with around $90,000 in loans, and no income as of yet. I’m coming in with a few years of working under my belt, and about $65,000 in savings. He lives fairly comfortably (on loans), I live fairly frugally. (I’m not cheap, but I’m definitely mindful of my spending.)

We both want to combine finances within reason, though not completely – maybe a joint account in addition to separate accounts. We just can’t quite figure out how to do it. The loans will be accruing interest in a few months, and I’d love to just pay off $50,000 to $60,000 of it right off the bat because that will save us a huge amount of interest. I know the interest accrued will be my interest too. But I don’t feel comfortable just giving away $60,000 of my hard-earned savings! (He has not asked me to pay it off, and when I brought up the idea he was not so into it.) I know this will be my husband, and in a few years we won’t know whose money is whose, because it will all be one, but I can’t grasp the concept of giving away all my savings to someone else.

Hurricanes Harvey and Irma have come and gone, inundating huge areas with water. Fortunately, we in Baltimore did not have to deal with that catastrophe. But, to push a metaphor, many of us are inundated all the time by a sea of clutter. Imagine the folks in Florida having just a day to decide what to bring with them when they were told to evacuate. An uncluttered house enhances one’s ability to quickly decide and find what to pack, including such precious items as family photos, vital documents, and laptops.

We all struggle with clutter, unfortunately. And a huge portion of it is paper. When we procrastinate taking care of the paperwork, when we are confused about what to keep and what to throw away, the piles accumulate and take over our lives. Looking for records and trying to figure it all out consumes our time and saps our energy. We miss deadlines, pay fines, and feel generally stressed.

I often hear “truths” about personal finance that just aren’t true. They are more like myths. Here are some:

Myth #1: The rich do not pay taxes. We have all heard this one. It seems that there are secret tax deductions that only the rich are aware of. They find out about them from their secret accountants, who are the only ones who have access to them. Perhaps these deductions are written up in a secret book called Protocols of the Elders of Accountants. If this myth is true, why don’t these special accountants ever advertise their services? Why doesn’t a Google search bring up these secrets?

The truth is that the rich pay a lot of taxes, possibly over 40% of their total income. So, the next time you hear this said, please ask to see a copy of the tax return and confirm for yourself that it is a myth.