Most of us will be getting a tax reduction as of January 1st. Major tax reform typically occurs only once every few decades, and as you’ve probably heard by now, Congress has just passed a bill called the “Tax Cuts and Jobs Act”, which will impact virtually every individual and business on a level not seen in over 30 years.
There will be “winners” and “losers”. Corporations will see the biggest change, with the top rate of 35% dropping to 21%. When it comes to individuals however, the “reform” is not quite as reforming and simplifying as original proposals had aimed to be (remember the “postcard” tax filing we were promised?) – It’s really more of a series of cuts and tweaks (many of which will actually go away in 2025) which arguably present more complexity. With that said, there are still things for many individual households to like about the new tax laws (at least in the short term).
First, here are the new tax brackets, all of which are lower:
New Tax Brackets
Provisions That Will Impact Many of Our Clients
- The standard deduction will nearly double, going from $12,700 for Joint filers to $24,000 ($12,000 for individuals). This is the single biggest change for individual households, and, along with elimination of some popular individual deductions, will result in many more people choosing to take the standard deduction rather than itemizing
- The estate tax exemption is increasing to $11 million per person ($22 million for married couples with appropriate planning), which means 99% of inheritances will pass to heirs free of federal taxes going forward
- Changes to popular deductions and credits
- Mortgage interest deduction will be capped at $750,000 for homes purchased after December 31, 2017
- Deduction for most home equity debt (e.g. HELOC) will be eliminated
- State and local income taxes plus property taxes will have a combined deduction limit of $10,000
- All miscellaneous itemized deductions will be eliminated
- The Child Tax Credit is increasing to $2,000 per child and will be available for more families. The phase-out for joint filers previously began at $110,000 but is increasing to $400,000
- We will no longer be able to claim personal exemptions
- The Alternative Minimum Tax (AMT) will still exist, but higher exemptions mean it will impact far fewer people
- 529 plans can now be used for elementary and high school (up to $10,000 per student per year)
Notable Items Left Unchanged
- Capital gains and dividends will continue to receive the same favorable tax treatment
- The Affordable Care Act (Obamacare) was not repealed, and nor were the taxes that were added a few years ago to support it (though the penalty imposed on people who do not obtain insurance will be reduced to zero)
- Student loan interest deduction will remain
- Rules for 401(k) and other retirement plans will be generally unchanged
What Can You Do Before the End of the Year?
In general, we should be looking for opportunities to defer income into the new lower brackets in 2018 and accelerate deductions (especially those that may not be available next year).
Here are a few “low-hanging fruit” ideas:
- If you currently itemize deductions and make estimated payments for state and local taxes, you might consider paying your 4th quarter 2017 state and local tax estimate before December 31st (typically due mid-January) in order to get a deduction this year
- If you are charitably inclined and suspect you may have trouble clearing the big standard deduction next year (which is necessary to obtain any tax benefit for charitable giving), you might consider lumping together several years’ worth of charitable contributions into a donor-advised fund before December 31st. You can then dole out donations from the donor-advised fund to your favorite charities over the next few years
- Ensure you have maximized all of your retirement deferrals for the year (this is something we generally recommend each year)
Many things in the new tax code are beyond the scope of this blog. These include but are not limited to accelerating other deductions, AMT considerations and corporate tax implications. Deerfield will be keeping abreast as new tax planning opportunities and strategies emerge, so please reach out to us if you would like help understanding what the new law means for you.