As you know, major tax reform legislation has made it through the House and Senate, and is heading to President Trump’s desk for his signature soon. In an effort to keep you informed, we put together a list of the top 10 changes that are of interest and could impact our clients.
First, individual tax brackets – while we will still have 7 tax brackets, most are going to decrease by a few percentage points, and the new top rate will be 37%, down from 39.6%. Please keep in mind that while corporate changes are permanent, individual cuts are scheduled to sunset after the year 2025.
# 2, C-corporation tax rates have decreased down from 35% to 21%
#3, Personal Exemptions have been repealed, but the standard deduction has about doubled. It looks like net net, this new expanded standard deduction will represent only a slight increase.
#4, the Child Tax Credit is increasing from $1,000 to $2,000 per qualifying child under the age of 17. Additionally, the income phaseout rules for this credit are substantially increasing from $75,000 for individuals and $110,000 for married couples up to $200,000 for individuals and $400,000 for married couples.
#5, there is now a $10,000 cap on state and local income and property tax deductions (also know as SALT). Please keep in mind that the new bill does NOT allow for prepayment of 2018 state income taxes.
#6, mortgage interest deduction is now limited to loans of $750,000 and home equity loan interest is no longer deductible. Note that this limitation only applies to new mortgages taken out after December 15th of 2017, but that existing home equity debt will NOT be grandfathered – in other words, after 2017, interest on home equity debt will not be deductible unless the funds were used for substantial home improvements.
#7, you can now use 529 plan distributions tax-free to pay for private elementary and secondary school expenses. The limit is $10,000 in distributions per student each year, and includes public, private, or religious schools.
#8, Alternative Minimum Tax (or AMT) has been significantly altered, and will now impact fewer taxpayers.
#9, estate and gift tax exemptions have been doubled from what would have been $5.6mm in 2018 to $11.2mm for individuals or $22.4mm for married couples with the portability feature. No other changes were made here – step-up in basis remains as does the top 40% tax rate on estates over that exemption level.
And lastly, #10, the individual health insurance mandate (penalty) has been eliminated, but not until 2019.
A couple of topics clients were worried about that DID NOT make it into the final tax bill were the FIFO or “first in, first out” treatment for sold investments and the change of capital gains exclusion on sales of primary residences.
I wanted to review the top 10 changes we thought clients would be interested in, but please be aware that there are additional changes in a few other categories that may impact you. Some of these include alimony payments, 1031 exchanges, depreciation for business cars, deductibility of entertainment expenses, and new passthrough entity deduction. If you are interested in learning more about these changes, please reach out.
Although everyone’s tax position is going to be impacted differently, there are a few planning strategies to share with you before year-end. In general, you may want to consider deferring income into 2018 when tax rates will be lower, while accelerating deductions to 2017 that may not be available next year. Although the new law does not allow you to prepay 2018 state tax liabilities, you may pay your 4th quarter 2017 state taxes (that would normally be due mid-January) by December 31st, 2017 in order to obtain the deduction this year.
What hasn’t changed is that our tax code continues to be complicated, and we always recommend that you consult your tax advisor to understand how this new tax bill will impact your personal situation.
Thank you for taking the time to read this. As always, if you have any questions, please feel free to reach out.
Source: Kitces, Michael. (2017, December 18). Final GOP Tax Plan Summary: Tax Strategies Under TCJA 2017 (https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies)
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