On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act. Ever since then, politicians and pundits alike have been offering their opinions on the implications of the sweeping tax reform legislation.
The experts at MBAF have been taking a professional and unbiased approach to analyzing the impact of the new law, and we have produced what we believe to be the most essential “takeaways” from the Tax Cuts and Jobs Act for individuals.
There are still seven tax brackets which generally lower the tax burden at all income levels. Higher earners (incomes in excess of $500,000 for singles and $600,000 for married filing jointly) will benefit from a lower top tax bracket (previously 39.6%; now 37%) and no “claw back” of the lower tax brackets under the new law.
The following table describes the 7 new tax brackets.
|Rate||For Unmarried Individuals,
Taxable Income Over
|For Married Individuals Filing Joint Returns,
Taxable Income Over
|For Heads of Households,
Taxable Income Over
In addition to the changes in tax brackets, there are other significant changes, which will impact the tax obligations of individual taxpayers, here are 9 other key takeaways and tax planning strategies to round out our Top Ten Takeaways from the Tax Cuts and Jobs Act for individuals.
- Plan Ahead – Don’t assume your current withholding will be sufficient. Plan ahead for 2018, monitor your expected tax liability and double check your withholding and make estimated tax payments to avoid penalties accordingly.
- Standard Deduction vs. Itemized Deductions – Review your deductions and determine if they will fall below the new standard deduction or if you will be eligible to itemize; if the latter, then consider bunching of expenses such as charity every other tax year. Changes to note:
- The personal exemption has been eliminated.
- The standard deduction for single individuals has been increased to $12,000 from $6,500 and married couples to $24,000 from $13,000.
- The standard deduction amounts will be adjusted for inflation beginning in 2019.
- Miscellaneous deductions which exceed 2% of your AGI will be eliminated for the tax years 2018 through 2025.
For taxpayers wishing to itemize rather than avail themselves of the higher standard deductions, there have been changes to the deductibility of certain items, one of the most significant of which is the deduction of State/local income tax and real property taxes are capped at $10,000. Therefore, taxpayers living in states with an income tax, may see higher taxes even if the federal rate reduction provides them with overall tax savings. This will all depend on the state in which they live and their particular profile. Mortgage deductibility has also changed. From now until 2025, taxpayers can continue to deduct mortgage interest only on mortgage debt of up to $750,000. However, the limit remains at $1 million for mortgage debt incurred before December 15, 2017.
- Review Your Charitable Planning Strategy – With the passage of The Act, certain charitable contributions are no longer deductible, such as contributions made in exchange for seating at college sporting events. The limit on the deduction for cash donations made to public charities is has gone up 60% of adjusted gross income (AGI) from 50% before The Act. Still, taxpayers may want to now consider Donor Advised Funds, and Charitable Remainder Trusts, and gifts of appreciated securities rather than cash.
- Business Owners – While this is our list of impacts on “individuals,” many such individuals are business owners who receive “pass-through income.” Owners of such “pass-through” entities pay taxes under the individual income tax code, and not the laws governing corporate taxes. Sole proprietorships, S corporations, partnerships and LLCs are all pass-through entities. Owners need to determine their eligibility for the 20% Qualified Business Income Deduction. Furthermore, for such business owners:
- Net Operating Losses (NOL’s) are no longer available for and must be carried forward.
- Carryforwards are subject to an 80% deduction limitation, in other words a 20% disallowance.
- There are also now limits on the deductibility of meal and entertainment expenses.
In addition, a new provision was incorporated into the tax law, for which congress and the IRS have currently provided little guidance. It will effectively limit business losses flowing to individuals with greater than a $500,000 loss in any given tax year, and defer that loss to future years in the form of a Net Operating Loss.
We will soon be producing a separate list of takeaways from The Act for business owners.
- Review Your Investment Strategy –While the Tax Act made no changes to the preferential tax rates on capital gains (the 0%, 15% and 20% rates on capital gains are unchanged), the loss of the deduction for investment advisory fees makes your cost to invest that much greater. This means you may want review your strategy and consider a shift to a commission based, and mutual fund/ETF investing rather than a “fee-based” advisory firm. Also note that certain investment incomes (i.e. REIT dividends and MLP income) will be eligible for the Qualified Business Income deduction without limitation.
- High Net Worth Individuals – The Act doubles the Estate and Gift Tax Exemption, raising it from the 2017 level of $5.49 million to approximately $11.2 million, but the tax continues to be in effect. In 2026 the exemption reverts back to the law in existence in 2017. Taxpayers with assets greater than $10M (single) and $20M (married) or more, should take advantage of the window of opportunity to make gifts before the estate tax unified credit goes down in 8 years. A review of your wills and trusts is a great idea, keeping in mind that State estate taxes and exclusions may be different than Federal. In addition, the Alternative Minimum Tax is effectively gone, but not forgotten. While many taxpayers will no longer be subject to this tax due to the increase in the floor and exemptions, as well as the disallowance of the SALT deductions and the 2% floor deductions, for many High Net Worth Individuals, the AMT could still be a factor.
- Family Deduction – While personal exemptions have been eliminated under the Act, there has been a corresponding increase in credits for families with dependent children. The Act raises the Child Tax Credit from $1,000 per dependent child up to age 17, to $2,000 per qualifying child. The refundable portion of the credit is limited to $1,400, adjusted for inflation after 2018. The Act increases the phase-out of the credit from $110,000 prior to passage to $400,000 for married couples filing jointly.
- 529 Plans – Beginning in 2018 the qualified education expenses definition has been expanded to include elementary or secondary public, private, or religious school. However, there will be a $10,000 annual limit on distributions for any of the aforementioned expanded expenses.
- Seek Professional Tax Advice – This should go without saying, but even taxpayers whose tax preparation was relatively simple prior to the passage of the Tax Cuts and Jobs Act, may now find their returns more complex, and require the expertise of a professional. Those who have never filed their own taxes, should now not only rely on a tax professional, but on a CPA, who is well familiar with the changes, and nuances created by the new laws.
Barring further action from Congress, most of the individual income tax changes are temporary, effective from January 1, 2018 through December 31, 2025.
This is just a brief snapshot of how the new tax laws will impact individual taxpayers. For more or our in-depth analysis of the Act, please watch our informative webinar.
How MBAF Can Help
While there are aspects of simplification for some, there are new, added complexities for entrepreneurs and business owners. Since tax season is upon us, now is the time to analyze your tax situation and make any adjustments to maximize the potential benefits to be found in this tax legislation.
We realize that tax strategies and estate planning, particularly for high net worth individuals, are designed for the long term, and many of your plans are already in place, and may, or may not, be impacted by the passage of the tax reform bill.
However, we also realize that good tax strategies are designed to be flexible. There may be options and opportunities that the new reforms could create that you may not be aware of. We can help you to evaluate your current estate planning and tax strategies in light of the Tax Cuts and Jobs Act, and your individual circumstances.
Compliance with and understanding the tax codes regarding income taxation can be complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474.