Tax Code Changes that Affect Your Savings Strategy

The Tax Cuts and Jobs Act (TCJA) that was signed into law at the end of 2017 was touted as the most significant overhaul of the tax system in three decades. The changes are wide-ranging, impacting everything from corporate and personal tax rates to mortgage and charity deductions, and likely changing your overall tax return.

Not surprisingly, the 500-plus-page law creates new opportunities and complications for anyone who wants to save money. Here are a few of the most important changes that may impact your federal tax return, and your savings strategy.

Bracket busters. Tax reform didn’t reduce the number of tax brackets, but it did change and lower the income tax rates in the existing brackets. And for many, that means tax cuts. For example, what was once a 25% rate that applied to incomes ranging from $77,400 to $156,150 for couples filing together is now a 22% rate that covers incomes between $77,400 and $165,000. As a result, many people have already seen a bump in their take-home pay as employers tweak their withholdings. And for many, this extra income can be used to augment savings.

Location matters. Whether or not the new tax rates will boost your ability to save more of your income is a question that is heavily impacted by where you live. One change in the tax code now caps deductions for state and local income taxes. In high-tax states like California, New Jersey and New York, the reform could eliminate or outweigh the savings benefit offered by lower federal tax rates. Geography is also a factor when it comes to reducing the amount of mortgage debt homeowners can deduct, which is down from $1 million to $750,000 (for those married and filing jointly). That change will make savings more of a challenge for people living in states with expensive real estate.

The end of a Roth IRA loophole. Savers have long favored Roth IRAs because they offer tax-free income in retirement. Another reason for their popularity is that traditional IRAs could be converted into Roth IRAs, which gave savvy savers a way to handle a handful of adverse tax situations. But the new tax code eliminates conversions—known as recharacterizations—and the handy tool they provided for savers nearing retirement.

Changes to 529 plans. In the past, 529 plans were a tax-advantaged way for parents to save for college expenses. The latest set of tax reforms will allow 529s to benefit students before they reach a college campus, by allowing assets in the plans to be used for elementary and secondary education tuition and expenses at all public, private and religious schools.

If the tax code changes are helping you keep more of your paycheck or providing a higher tax refund, you may want to consider taking the opportunity to save for the future. Here are a few ways to start.

• A money market account is one way to earn interest on your savings. It also gives you regular access to your money, and even the ability to write occasional checks from the account.
• A high interest savings account is another way to make sure that your money earns an above-average savings account rate. And though you can’t write checks from it, you do have regular access to your money.
• A Roth IRA is a retirement account that offers tax advantages once you reach retirement age. You can withdraw your contributions to it without a penalty before you retire (though you may face tax implications, so check with your tax advisor).
• A certificate of deposit allows you to earn a higher rate of interest on your longer-term savings. While you won’t have the same immediate access to your money, it will earn more over time.

With a little extra money, and a plan, you may find that the new tax reforms can be just the boost you need to take on some of your biggest savings priorities.

Chris Warren is a former editor at Los Angeles magazine whose writing has appeared in publications including the Los Angeles Times, Institutional Investor and National Geographic Traveler.