Well, they’ve finally done it.
The Republicans passed a major bill, in this case the 2017 Tax Cuts and Jobs Act (TCJA), without a single Democratic vote. Before explaining the key parts you should be aware of, let me just say that
a) I think there are more good parts than bad parts to this bill, and
b) it is a true shame any time the only way our democratic process works is when one party shoves a bill down the other party’s throat without any apparent attempt to find ways to work together.
So, what steps should you take now that the TCJA has been passed? What are your financial considerations, tax cuts and all? Let’s look at what the new tax legislation will change.
I’ve included some the key things you will want to consider doing before year end.
As a comprehensive tax bill, the TCJA is quite complex.
Some parts of this bill expire in a few years; other parts are permanent. As a result, the lower taxes for people come in the bill’s early years.
Tax burdens would increase in 2026 and 2027 unless there are future modifications made by congress.
- Personal tax brackets at all income levels have been lowered and standard deductions are being doubled (to $24,000 for married couples; $12,000 for single filers), both of which would save taxes for almost everyone if there weren’t other changes as well.
The personal exemption for individuals and dependents, which was $4,050 in 2017, is being repealed.
- Long-term capital gains and qualified dividend tax rates remain at 0%, 15% and 20%, and their respective brackets have increased slightly and are indexed for inflation.
- From 2018 to tax year 2025, child tax credits have been doubled to $2,000 (up from $1,000) and the income levels at which these are phased out have been increased to $400,000 for married couples (up from $110,000).
For single filers, the new relevant number here is $200,000 (up from $75,000). Depending on reported income, these may be refundable credits, up to a maximum of $1,400.
Some of the offsetting changes will include the following.
- A lower limitation on the deductibility of state and local taxes (SALT). Beginning with 2018 (through 2025) SALT deductions will be limited to $10,000. This will include the aggregate of both property taxes and state/local income taxes.
- The amount of mortgage on which interest can be deducted is being lowered from $1mm to $750,000 for new debt through 12/31/25. Deduction on home equity loans is eliminated through the same date. The new limitation does not apply to home mortgages which were incurred prior to December 16, 2017.
- The threshold to deduct medical expenses has been lowered to 7.5% of AGI (down from 10%) through 12/31/18. In other words, more medical costs will now be deductible.
- Miscellaneous deductions are being eliminated between 2018 and 2025. This includes tax preparation expenses, investment advisory fees, unreimbursed job expenses, and hobby expenses, among other things.
- Alimony treatment is changing completely. Currently, alimony payers were able to deduct their payments and recipients had to claim it as income. Under the new law, there is no deduction, and alimony is included in gross income for the payer spouse. This will apply to any divorce or separation agreement executed (or modified) after Dec. 31, 2018.
- From 2018 to tax year 2025, charitable contributions are changing slightly. The existing 50% AGI limitation for cash contributions to public charities and certain private foundations is increased to 60%.
- Qualified moving expense deductions and the income exclusion provided for moving expense reimbursements have been suspended from 2018 to 2025, except for active duty Armed Forces personnel.
- Many higher-income taxpayers will have their Schedule A Itemized Deductions reduced by up to 80%; taxpayers will be able to fully utilize their listed itemized deductions; this limitation is going away from 2018 to 2025.
Other changes in the TCJA
- The kiddie tax is simplified for 2017 and beyond. Children with earned income are taxed under the single filer’s tax rate. Net unearned income (all income produced by property belonging to the child, one example being UGMA/UTMA assets) is taxed under trust and estate tax rates, rather than their parents’ marginal tax rate.
- The alternative minimum tax (AMT) for individuals is retained, with higher exemption amounts. There are a number of very complex rules around this process. It is important to note that AMT for corporations is being repealed.
- 529 Accounts to help set aside money for college have been very popular. The Act expands how they can be used. After 2017, “qualified higher education expenses” will include tuition at an elementary or secondary public, private, or religious school. Distributions to these new categories are limited to $10,000 per tax year.
- Between 2018 and 2025 the Act provides that if an individual has a net disaster loss, the standard deduction is increased by the net disaster loss, making it easier for victims to get tax relief. This largely doesn’t apply to taxpayers subject to AMT.
- For the same period disaster victims will be subject to a higher floor before they can claim a loss, but will benefit because the 10%-of-AGI threshold won’t apply.
- Disaster victims who need to pull money from most retirement accounts will not be subject to the normal 10% early withdrawal penalty, up to $100,000 of qualified withdrawals. The income from such withdrawals can be spread evenly over three years.
- The itemized deduction for personal casualty losses would be restricted to losses incurred in a presidentially declared disaster area. This sunsets after 2025.
- With regards to estate taxes: between 2018 and 2025 the estate tax exemption (what is not subject to taxes) doubles to approximately $11.2 million per person ($22.4 million per married couple). These amounts are still indexed for inflation.
- Corporate taxes will be lowered effective 1/1/18. This was a primary goal of the legislation, based on the belief that the US economy is losing out due to higher tax rates than almost anywhere else in the world. The new 21% tax rate will help competitiveness. Personal service companies (most lawyers, doctors, financial advisors, etc.) largely do not benefit from these changes. The corporate alternative minimum tax is going away. Unlike personal tax rates, most of these reductions are permanent.
- Deductions for certain fringe benefits, such as business entertainment expenses, have been limited.
- The limit on Section 179 deductions wherein businesses can deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year is increased to $1 million, up from $500,000. There are some more complex provisions for expensing acquired property.
- Inflation is redefined. It has been broadly revised to a new index, “chained CPI,” which has typically grown more slowly than the current CPI-U index. This change is not set to expire.
- Starting in 2018, reversing or re-characterizing a Roth IRA will no longer be permitted.
- The Obamacare Individual Mandate has been repealed starting in 2019. This provision previously required individuals not covered by a health plan to pay a penalty, which encouraged people to enroll in Obamacare and helped support Obamacare services. The Tax Cuts and Jobs Act leaves intact the 3.8% net investment income tax and the 0.9% additional Medicare tax, both enacted by Obamacare.
Moving forward: recommended action items for you to consider
- If you’ve been subject to the AMT, check with your CPA before year end to see what actions will be most applicable to you. The advice may differ for your circumstances.
- If you will owe any state or local taxes on your income for 2017 which hasn’t already been paid, be sure to pay all those possible amounts due before 2017 ends. You cannot prepay 2018 taxes, but you can fully pay what’s going to be due for 2017.
- If you have received a bill for property taxes, you should pay it in 2017. Typically you would pay half in December and half again in April. Pay the April portion now.
- If you have deferred income choices to be made, check with your tax advisor to compare impact of doing so now given the lower tax rates next year.
- Charitable gifts: to the extent possible, use appreciated assets (stocks or funds, for example) not cash. If you want to bunch contributions into a single year, for distribution to charities in future years, consider a donor-advised fund.
- Have incentive stock options? Talk to your advisor about how to time the exercise of these options in years they are not subject to AMT due to the new higher exemptions.
- Estate taxes are more liberal for the wealthy, but only for a few years. Do your planning conservatively, with the future rates (returned to where they are today) in mind, except in unusual circumstances.
- Pass-through businesses (partnerships, LLCs, S-Corps and sole proprietorships filing a Schedule C) that are not personal service entities will enjoy substantially lower tax rates. Planning for how to best take advantage of this will be important for most business owners.
This is the first new major tax law since 1986. The Republican hope is that it will lead to meaningful higher wages, more jobs and economic growth.
Given the temporary nature of the changes directed at individual taxpayers (as opposed to businesses), it may not have the full intended impact. If so, the TCJA could add further to our high national deficits.
It almost certainly will cause harm to Obamacare and its desire to have all citizens have affordable and quality healthcare.
Planning and advice will continue to be crucial as the tax environment changes. As noted, this is not meant to be a comprehensive list of all the implications of the act.
If you have questions about any of the above, please call Mosaic or your tax advisor.
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