The “Tax Cuts and Jobs Act” was signed into law last week. We’ve reviewed the updated tax code and wanted to provide a succinct summary of the changes.
Overall, the bill will cut taxes for approximately 75% of filers. But as always, the devil is in the details. Everyone will be affected in a unique manner, depending on filing status, income level, size of family, and a number of other factors. Please see our findings below, and contact us and/or your tax advisor with any questions.
Updates for Individuals and Families
- Tax Rates & Brackets: Seven tax brackets remain. Five are lower by 1% – 4%, and two are unchanged. As a result taxpayers will see a decrease in their overall and marginal rate. Notably, the top bracket is decreased by 2.6%. The income ranges are also updated slightly.
- Long-Term Capital Gains & Qualified Dividends: There are no changes to the tax rates on long-term capital gains (investments held longer than one year) and qualified dividends. However, the income ranges are marginally updated.
- Standard Deduction: The standard deduction, which reduces reportable income for those who do not itemize deductions, has been nearly doubled. This will reduce taxes for the vast majority of filers.
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- Personal Exemption: The new tax plan eliminates the personal exemption, which deducted $4,050 from taxable income for each taxpayer and dependent claimed. This will negatively impact all taxpayers, particularly larger families.
- Alternative Minimum Tax (AMT): The Alternative Minimum Tax is a parallel tax system that is triggered when the filer makes more than a certain “AMT taxable income,” which is calculated differently than adjusted gross income (with less influence from itemized deductions). AMT is currently imposed at a rate of either 26% or 28% above that level, and the taxpayer must pay the greater of AMT or regular tax.As of today, AMT most commonly affects those who make between $150,000 – $600,000. However, due to increases in the AMT exemption amount, the new tax bill will largely decrease the number of households affected by AMT.
- Child Tax Credit: The Child Tax Credit is applicable for taxpayers supporting a dependent child 16 or under. Tax credits, not to be confused with tax “deductions,” directly reduce taxes owed on a dollar-for-dollar basis. The Child Tax Credit has doubled from $1,000 to $2,000 per child. In addition, the income phase-out rules have been increased considerably. This will benefit families of all sizes, particularly large families.
|Current Law||Current Phase Out||New Law||New Phase Out|
- Itemized Deductions: Itemized deductions will have more limitations, which particularly impacts high-income earners (who are more likely to itemize). In fact, with the increased standard deduction and minimization of itemized deductions, it is anticipated that the vast majority of taxpayers will not itemize. The most impactful updates include:
- State Income Tax, Local Income Tax, and Property Tax: Taxpayers will be able to deduct their combined state income tax, local income tax, and property tax, up to a maximum of $10,000. This applies to both individuals and married couples, but is reduced to $5,000 for those married filing separately. This will mostly be a negative to those in California, which has a high state income tax and property tax. We recommend that you consider paying your 2018 property taxes in 2017, as you may not be able to fully deduct those taxes next year. Please consult with your tax advisor.
- Mortgage Deduction: For mortgages taken out after December 15, 2017, the mortgage interest deduction is limited to $750,000. Existing mortgages retain their ability to deduct interest up to $1,000,000. Refinances will also retain a $1,000,000 limit, but only for the remaining debt balance.
- Medical Expenses: Under current tax law, you are allowed to deduct qualified medical expenses in excess of 10% of your AGI. The new law reduces that threshold to 7.5%, both for 2017 and 2018. However, after 2018 it will revert back to the original 10% of AGI threshold.
- “Miscellaneous Itemized Deductions”: Investment advisory fees (such as Opes’ management fee), tax preparation fees, and other “miscellaneous itemized deductions” that were applicable if greater than 2% of AGI, will be completely repealed. If you currently pay Opes’ management fee from your taxable account, but also have an IRA under our stewardship, we may adjust how your billing is processed. We will contact you individually if you meet these criteria.
- 529 Accounts: This savings vehicle has been instrumental in helping parents save and pay for college. Interestingly, the new tax code now allows up to $10,000 per year, per child, to be withdrawn tax-free for qualified expenses related to a public, private, or religious elementary, middle, or high school. Examples of qualified expenses include tuition, books, and tutoring.
- Estate & Gift Tax: The gift and estate tax exemption was doubled, to $11.2 million for individuals and $22.4 million for couples. Those over the threshold will continue to pay the current 40% tax rate. Overall this will result in fewer Americans paying the estate tax.4
- Other important features:
- The individual mandate, which requires individuals to purchase health insurance or pay a penalty, will no longer apply beginning in 2019.
- Tax Credit for Electric Cars: Those purchasing electric vehicles will remain eligible for a credit of $2,500 – $7,500 (depending on the battery capacity of the vehicle).
- 1031 Exchange: The new law only allows 1031 exchanges for real estate. It is no longer applicable to other types of like-kind assets.
Updates for Corporations
- The corporate tax rate will be lowered from a tiered system with a top rate of 35% to a flat 21%. The AMT for corporations will also be repealed. This is a very pro-business move.
- Repatriation: Cash and cash equivalents held offshore by corporations will be taxed at a 15.5% rate when brought back to America, as compared to a top rate of 35%. Income from illiquid assets, such as manufacturing plants, will be taxed at 8%.
- “Pass-through” businesses, such as S corporations, LLCs, partnerships, and sole proprietorships, are eligible to deduct 20% of their income. This will reduce their tax bracket and taxable income.
Opes Advisors is not a tax or accounting firm. Please consult your tax advisor or financial planner for details specific to your situation.
Thank you for your continued trust,
The Opes Advisors Team
Written by: Will Steinberger