This holiday season wouldn’t be complete without a quick discussion on the recent Tax Bill passage. The Tax Cuts and Jobs Act (TCJA) of 2017 promises something for everyone. For most individuals and couples, this bill is really just a tweak to the current system. For Businesses and Corporations, this is a major change.
To highlight some of the changes for families. The Current 7 bracket system remains, but almost every bracket will be lower than last year. The top marginal bracket will be 37% instead of the current 39.6%. Capital Gains treatment remains largely in place though no longer lining up directly with the ordinary income brackets.
There are also going to be changes to personal exemptions and the standard deduction. The current $4,040 per person personal exemption is suspended, however, the standard deduction will be increased to $12,000 for individuals and $24,000 for Married Filing Joint. This will make it more difficult for many to itemize.
If you can itemize, there are a few significant changes. You can itemize interest on a residence mortgage of up to $750,000 and the Home Equity loan no longer qualifies automatically as interest unless used for substantial improvement on your home. There are no longer any Miscellaneous itemized deductions subject to the 2% floor. This includes tax prep cost, advisory fees on non-retirement accounts, unreimbursed employee expenses and a few others. Medical deduction and Charitable contributions did make the cut and remain itemizable.
Since it will be more difficult to itemize, Charitable contribution strategies have already emerged. If you are over 70 ½, you can look at making Qualified Retirement Distributions directly to the Charitable organizations. This will satisfy your required minimum distribution and not show as taxable income on your return. There is also the possibility to do some “lump giving”. Giving multiple years’ worth of gifts in one year to a Donor Advised fund or to the charity directly may make it easier to itemize in one year instead of spreading it out. If you are currently eligible to collect a Required Minimum distribution, expect more information on these strategies in early 2018.
Estate Tax is still part of the current bill, but the 40% “death tax” doesn’t kick in until $10.98m for individuals or $21.96m for couples. This almost doubles the current exclusion.
A few other areas that changed include an expanded exemption amount for Alternative Minimum Tax, Unearned income from Children is going to be taxed at Trust rates, and 529 Education accounts can be used for private schools and homeschooling. Also, families will see an expanded child tax credit. It has doubled from $1,000 to $2,000 in 2018 for children under 18 with the phase out expanding dramatically from $110,000 to $500,000. Expect more details on these provisions over the coming weeks.
Finally, there is a lower income tax rate on corporations and the introduction of a 20% passthrough credit on Qualified Business Income(QBI) of pass through entities. If you are an owner in a Sole Proprietor, Partnership, or corporation (C or S) there could be significant changes headed your way in 2018. We would encourage you to engage with your advisor as well as your CPA and attorney early in the year to make sure you are positioned to benefit from the new rules. We are working on a summary that will highlight the changes to business and will publish it to our website shortly.
As always, we encourage you to talk with your advisors.