They Did It! What the New Tax Bill Means for Taxpayers
December 21, 2017
By Resnick Advisors
Congress passed the Tax Cuts and Jobs Act on December 20, paving the way for President Trump to sign it into law. He may actually delay signing until January 2018 for political reasons, if he can’t get Congress to approve a waiver of automatic spending cuts that would be triggered, so that remains to be seen.
With the final bill approved, we have summarized some of the major changes impacting individuals below. One thing is clear – with so many interconnected changes, you can’t figure out how this impacts you on the back of an envelope, or even with a calculator! You will need to have your accountant test your return. Unfortunately, there is not a lot of time to do so, so we want to highlight some of the major changes here and potential strategies as well. Note – these changes will sunset in 2025, unless extended.
Some potential strategies you might discuss with your tax advisor
- Consider paying any 2017 state, local and property taxes you will owe now, and don’t wait until 2018. Note that Congress specifically prohibits prepaying state and local income tax for 2018 and future tax years.
- If you think you will take the standard deduction for 2018, consider making a larger year-end donation to charity in 2017.
- Check that doing the above will not increase your tax liability for this year by causing you to pay the Alternative Minimum Tax (AMT).
Summary of major changes
- New tax brackets – top rate reduced to 37% and brackets are changed as below. No changes to capital gains and dividend rates.
- AMT remains for individuals, but at higher income levels and exemption amounts are increased, so should impact fewer individuals.
- No change to cost basis rules which would have forced selling oldest shares first.
- Many deductions changed, eliminated or reduced:
- Increased standard deductions to $12,000 for single and $24,000 for joint filers. Personal exemption deductions eliminated.
- Mortgage interest deduction allowed on new mortgages taken after 1/1/18 for up to $750,000 on first and second homes, but not for home equity lines of credit.
- State and local tax deductions can be taken up to a total of $10,000 in a combination of property tax, income and sales tax.
- Repeal of almost all miscellaneous itemized deductions subject to 2% Adjusted Gross Income (AGI) floor, like tax preparation fees, investment advisory fees, and unreimbursed employee business expenses.
- Reduction in taxes for “pass-through” businesses which can deduct 20% of their income. Different businesses are treated differently and this provision is complicated, so talk to your tax advisor.
- Deduction for medical expenses is kept, but the AGI hurdle floor is lowered to 7.5%, from 10%.
- Estate and Gift tax exemptions doubled to $11.2 million per person and portability for spouses is retained.
- 529 plan funds can now also be used to pay for private elementary and high schools, up to $10,000/year.
- Increased child tax credit increased from $1,000 to $2,000 and expanded to higher income levels
In the interest of brevity, we are only outlining personal income tax changes. With so many changes, the impact will be understood over time. As always, please feel free to call us with any questions.