On Wednesday, December 20th, Congress passed the broadest tax reform in a generation and we expect President Trump to sign it into law by week’s end. Most of the provisions for individuals take effect on January 1st, 2018 and without further action expire after 2025. It will have almost no impact on 2017 taxes.
Here we have identified ten important provisions in the new legislation and how they may impact your taxes.
1. Tax Brackets Are Reduced
The new bill keeps seven tax brackets, but lowers the rates shifting income into lower tax brackets. Long term capital gain rates are unchanged, but short-term capital gains will be taxed at the lower ordinary income tax rates. High income taxpayers will continue to pay an additional 3.8% tax on investment income.
2. Standard Deductions Are Increased
Standard deductions are nearly doubled to $12,000 from $6,350 for single filers and to $24,000 from $12,700 for married filers. 70% of filers use the standard deduction, instead of itemizing deductions, so most taxpayers will likely benefit from this provision.
3. Changes to Itemized Deductions
Due to the higher standard deduction many itemized deductions are reduced or eliminated. State, local, and property taxes will be limited to a $10,000 deduction on any combination of the three. The mortgage interest deduction on new loans will be capped to $750,000 of indebtedness, down from $1,000,000. The deduction will apply to first and second homes, but not to home equity lines of credit. Numerous other itemized deductions will be eliminated such as tax preparation, moving expenses, and alimony.
The primary itemized deductions that will remain are medical expenses and charitable donations. On medical expenses the limitation is lowered to 7.5% for 2017 and 2018, and reverting to the current 10% in 2019 and beyond. The deduction for charitable contributions remains with minor adjustments.
All else being equal, if you live in a high tax state with a mortgage and high property taxes these changes could increase your tax liability. However, if you take the increased standard deduction these changes won’t be an issue and the higher standard deduction could end up benefiting you.
4. Child Tax Credit Increased
The child tax credit is increased in the final bill to $2,000 from $1,000 and the income level of households eligible for the credit are increased. The credit is refundable up to $1,400 and begins to phase out at $400,000 of income for joint filers and $200,000 of income for single filers. This will likely benefit middle and low-income households with children.
5. Personal Exemptions and Dependent Deductions Are Eliminated
The personal exemptions and dependent deductions are eliminated in favor of the higher standard deduction and increased child tax credit. For middle to low income households the combination of changes will likely be a net positive, but it could hurt higher income households with children if they don’t qualify for the child tax credit due to income phaseouts.
6. AMT Exemptions and Phase-Outs Are Increased
Some versions of the new tax bill eliminated the Alternative Minimum Tax, or AMT, but the final version kept the AMT but modified it such that it will not apply to many taxpayers who previously had to contend with it. The AMT exemption amount was increased to $109,400 for joint filers and $70,300 for all other taxpayers. In addition, the phase-out thresholds are increased to $1,000,000 for joint filers and $500,000 for all others. These changed should benefit many high and middle-income taxpayers who previously were affected by this tax.
7. Estate Tax Changes
The final version of the bill doubles the estate tax exemption to $11 million for an individual and $22 million for couples. This will eliminate estate tax concerns for the vast majority of taxpayers.
8. Tax Treatment of Investment Sales Unchanged
Early versions of the bill required a “first in, first out” (FIFO) method when calculating gains on the sale of investments. Investors can breathe a sigh of relief that did not make it in the final version, so investors still have the option of selecting specific tax lots on the sale of investments to best meet their tax and investment goals.
9. 529 Account Expansion
The bill expands the available uses of a 529 college savings account by allowing up to $10,000 per year of money to be used for K-12 tuition. This is in addition to the still allowed post high school uses.
10. Repeal of The Individual Mandate
The bill also strikes a blow to the Affordable Care Act, also known as Obamacare, beginning in 2019 by removing the requirement that individuals purchase health insurance or pay a penalty.
11. No Changes to Retirement Accounts
Early rumors involved changes to retirement savings accounts that could hurt savers, but the final version included no significant changes to the deduction taxpayers receive for contributing to tax deferred retirement vehicles such as 401k plans and IRAs.
12. Changes to Pass Through Entity Taxation
This is a complex area of tax law and affected taxpayers should talk with their tax advisor about how changes may impact them. In general, the bill allows pass through entities such as S corporations, limited liability corporations, and partnerships to exclude 20% of their net income from taxation. The deduction has some limitations and certain service trades such as doctors,
lawyers, and accountants may not be able to fully use the deduction. Overall, the changes will benefit many business owners even if a lot of service businesses cannot participate in all the benefits.
13. Corporate Tax Reduction
The final bill reduces the corporate tax rate from to 21% from 35%. Lowering the corporate tax rate will especially benefit smaller domestic companies who pay a higher average tax rate than large multinational firms. This will increase the profits of many companies which could provide capital for business expansion, increased dividends and share buybacks for shareholders, wage increases for workers, and make the U.S. a more attractive place for foreign businesses to open operations.
We believe that most taxpayers will pay less under the new tax bill, but changes in your personal tax liability will depend on your individual situation. This is a preliminary summary of important changes, but details are still emerging. While it is easy to focus on one or two big components of the bill when making decisions, it is important to consider how all the changes work together to impact your tax liability going forward. Now may be a good time to schedule a time to talk with your Blackhawk Capital Partners advisor to discuss how these changes may impact your financial plan or investment objectives.
We hope you have found this review helpful and thank you for your continued trust in Blackhawk Capital Partners.
Warm Regards, Chris Nei
Blackhawk Capital Partners
Registered representatives offering securities through United Planners Financial Services, Member FINRA, SIPC. Advisory Services offered through Blackhawk Capital Partners. Blackhawk Capital and United Planners are independent companies.
Material discussed is intended for general information only. We do not offer tax or legal advise. Please seek such advise from your own tax or legal professional.