Tax Cuts and Jobs Act: What Does Tax Reform Mean for You?

Tax Cuts and Jobs Act: What Does Tax Reform Mean for You? It’s going to take more than a postcard to file your 2018 taxes even with recent tax reform. A reduction of corporate tax rates is a prominent part of the bill, however, the Tax Cuts and Jobs Act of 2017 seemingly will provide a tax break to most Americans. How it affects you, of course, will depend on your personal situation. Below we have highlighted some of the notables to individual taxpayers along with links to a few detailed resources that you might find helpful.

  • Brackets. The number of filing brackets (seven) has not changed for individual filers but rates have generally decreased across the board.
  • Standard Deduction. Personal exemptions (essentially a deduction for each member of your family) and the standard deduction have been consolidated into a larger standard deduction. This is generally negative if you itemize your deductions and the elimination of personal exemptions imposes an adverse effect if you have a large family.
  • Child Tax Credit. The loss of exemptions may be offset to some degree and possibly more by a child tax credit that doubles from $1000 to $2000 per child and is easier to qualify for based on income.
  • State and Local Income Tax. Californians and other high-tax state residents will get hit the hardest as state income tax and property tax deductions will now be limited to $10,000 total. You may consider paying your April property taxes before the end of 2017 if it may otherwise not be deductible in 2018.
  • The Alternative Minimum Tax. AMT is still alive but will affect less people.

Besides the “structural” changes above, the following could indicate a need for some planning.

  • Pass-Through Business Income. If you are self-employed or the owner of a small business, you are likely to get a break of up to 20% of “pass through” income subject to income limitations. This could encourage employees to convert to independent contractors (if flexibility allows) although other factors like loss of employee benefits and additional Social Security and Medicare (self-employment) taxes should be considered.
  • Mortgages. Current mortgages will be grandfathered and continue interest deductibility on debt up to $1M. However, the new provisions limit interest deductibility to $750,000 of debt for mortgages closed after December 15th and moving forward. Additionally, Home Equity interest (Loan, HELOC), is not deductible unless it is used for “acquisition” (which seems to include substantial improvement toward a property.) There is no grandfathering of interest deductibility for HELOC or Home Equity Loan proceeds not used for “acquisition,” so the new tax law might encourage you to pay that HELOC or Home Equity Loan off faster.
  • Charitable Contributions. Donating larger amounts to charity was made easier by increasing the “50% of income” limit to 60%. Given the changes to itemized deductions mentioned above, some may choose to take the standard deduction in one tax year while stockpiling itemized deductions (including charitable contributions) in another year. Donor-Advised Funds can be a resource for this strategy.
  • 529s. These popular “College” Savings Plans now will also allow tax-free distributions for private elementary and secondary school expenses for up to $10,000 per student each year.
  • Advisory Fees. Investment advisory fees and tax preparation fees were previously deductible when the total of these and other expenses exceeded 2% of adjusted gross income. Those fees are no longer deductible. Previously, it could make sense to have “taxable” (non-retirement) accounts pay the advisory fees for retirement accounts (since retirement account fees were not deductible). Given this change, adjust your fee setup to have IRAs pay their own proportional fees. (It can still make sense to have these taxable accounts continue to pay for Roth IRA fees, to maintain as much tax-free Roth money as possible.)

Want to dig deeper?

  • Here’s a video evaluating the potential changes to three American families in different situations.
  • This New York Times article focuses in on key issues with comparisons of “Now” versus the “New Plan.”
  • Michael Kitces lays out a helpful summary in his blog.

Please note we are just scratching the surface here. Understanding the changes and developing tax strategies will take shape over time. Consult your tax and financial advisors.

Happy tax planning!

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