The "Tax Cuts and Jobs Act" was signed into law at the end of 2017. Irrespective of your political affiliation, many would agree that this legislation is the most sweeping overhaul of the United States tax code in more than 30 years. The bill is complicated and long coming in at over 500 pages. In addition, many of the changes are considered temporary – meaning they go into effect in 2018 but expire after 2025.
You may be asking “how does this impact me?” That’s a challenging question to answer because everyone’s situation is different. But let’s examine some key areas to see how they might affect you.
Preferential rates for long-term capital gains and qualified dividends will continue to use the current thresholds of 0%, 15% and 20%.
The 0% capital gains rate now ends at $38,600 of taxable income for individuals and $77,200 for married couples. The 15% capital gains rate ends at $452,400 for individuals and $479,000 for married couples.
The 3.8% Medicare surtax on net investment income will also continue to apply with thresholds of $200,000 of Adjusted Gross Income (AGI) for individuals and $250,000 for married couples which makes the top capital gains rate 23.8%.
The original Senate bill proposed eliminating the option to select specific lots when selling stocks or ETFs. This provision did NOT make it into the final bill.
The overall changes to investment taxation are minimal. This means that when selling stocks, including company vested stock options, you can continue to sell them in the most tax efficient manner. Keeping an eye on short term versus long term gains will continue to be important.
The 401(k) and IRA maximum contributions remain at $18,500 and $5,500 respectively for 2018. Catch up contributions also remain the same.
Roth IRA conversions can no longer be recharacterized starting in 2018. However, Roth IRA recharacterizations will still be allowed to correct excess contributions to a Roth IRA.
This means you can continue to max out your retirement savings vehicles and if you happen to over contribute to a Roth IRA it can still be fixed in a tax efficient manner.
Deductions and Personal Exemptions
The standard deductions increase from $6,350 for individuals and $12,700 for married couples to $12,000 and $24,000 respectively. The personal exemption of $4,050 for you and each of your dependents has been eliminated.
You are now limited to deducting a TOTAL of $10,000 in state, local, AND property taxes. For mortgages issued after December 15, 2017 the interest deduction is limited to the first $750,000 of mortgage debt. Home equity line of credit interest is no longer deductible.
This means that if you itemize today then you will have to look at whether the new state, local and property tax limit will reduce your deductions. If your itemized deductions are below the new $12,000/$24,000 standard deduction limits you may have think differently about your itemizing strategies for housing, charitable giving and state and local taxes.
Child Tax Credit
Under the new rules, the Child Tax Credit is expanded from $1,000 per qualifying child under the age of 17 up to a credit of $2,000 per qualifying child.
The income phaseout rules for the Child Tax Credit are dramatically increased, from the current thresholds of $75,000 for individuals and $110,000 for married couples, up to $200,000 for individuals and $400,000 for married couples.
This means that if you have children under the age of 17 you will be able to use the credit(s) if your income is below the thresholds. This will help offset the loss of any of your children’s personal exceptions.
Alternative Minimum Tax and Tax Brackets
The Alternative Minimum Tax thresholds have been increased to $500,000 for individuals and $1,000,000 for married couples. This eliminates this concern for nearly everyone. According to the Tax Policy Center, approximately 200,000 households will be subject to AMT instead of 4.4 million.
The final tax brackets under the tax plan follow the original Senate proposal. The number of brackets remains unchanged at seven, the top rate falls slightly to 37% and most tax brackets are generally more favorable.
The good news for most people is that the new tax brackets will produce at least a small reduction in marginal tax rates for virtually all taxpayers next year. Married filers making less than $600,000 will also see a reduction in the “Marriage Penalty.” The new tax brackets are listed below.
Individual Tax Brackets
|New Rate||New Income Bracket|||||Old Rate||Old Income Bracket|
|10%||Up to $9,525|||||10%||Up to $9,525|
|24%||$82,500 – $157,500|||||28%||$93,700-$195,450|
Married Filing Joint Tax Brackets
|New Rate||New Income Bracket|||||Old Rate||Old Income Bracket|
|10%||Up to $19,050|||||10%||Up to $19,050|
The change in tax brackets along with deductions and credits may change some other financial strategies in 2018. The 28% tax bracket that started at $165,000 for a married couple has gone away and now couples can stay in the 24% tax bracket until they earn more than $315,000. Strategic changes could include moving from municipal to taxable bond funds and changing the mix between Roth vs. Traditional IRA/401(k) contributions.
Pass-Through Business Taxation
Beginning next year individuals can typically deduct 20 percent of their qualified business income from a partnership, S corporation and sole proprietorship. The law prohibits some service businesses from taking the pass-thru income deduction if the taxpayer enjoys a high income, so over $157,500 if the taxpayer is single and over $315,000 if the taxpayer is married filing a joint return.
The service businesses with restrictions include most traditional professional service firms (but not engineers and architects), athletes, performing artists, investment managers, financial planners, and any business that depends primarily on the skill or reputation of one or more employees or owners.
If you are self-employed it will be worth exploring your business structure options. Be aware that this provision sunsets in 2025 so it should not be the only factor when considering your business structure.
Additional Bill Highlights That May Impact You
Temporarily raises the estate tax exemption for single filers to $11.2 million from $5.6 million in 2018, indexed for inflation. This change is reversed after 2025.
Ends the individual mandate, a provision of Affordable Care Act that provides tax penalties for individuals who do not obtain health insurance coverage, in 2019. The mandate technically remains in place but the penalty drops to $0.
Creates a single corporate tax rate of 21%, beginning in 2018, and repeals the corporate alternative minimum tax. Unlike the tax breaks for individuals, these provisions do not expire.
529 plan rules are still the same for higher education. However, you can now withdraw up to $10,000 each year, per child, to pay for private or religious school and receive the same tax benefits.
There many additional changes to the tax bill as well as changes that were proposed in earlier versions that did not make it to the final bill. For example, the original version proposed changes to Health Savings Accounts and 401(k) contribution limits, but the final version does not.
Please remember that this summary is not meant to be considered tax advice. Due to the number of changes, it is critically important that you consult your tax and financial professionals to determine how this new tax bill might impact you and your specific situation.