After the 2016 election, many Americans wondered what the major overhaul to the US Tax Code would look like and what the tax bill changes would be. Rumors circulated that a bill would pass early 2017 and applied retroactively to January 1, 2017. But as 2017 transpired the glimmers of a retroactive bill faded. As we run toward the close of 2017, we may likely start 2018 with a new Tax Code. As of this writing, both the House and Senate have approved a Tax Bill, and the reconciliation committee produced a final document that will go on for final signatures.
Early on, this overhaul aimed to simplify a very complex Tax Code, and in fairness, the early stage proposals were doing exactly that. As the bill progressed through the political system it began to look just as complex as the current system, with the most significant cuts matched with takeaways.
We’ll start with what we know will be different for taxpayers going forward, looking only at individual taxpayers. We excluded the changes to the corporate tax code, of which are many, and we recommend consulting with your accountant on how those changes impact your business.
As professionals started to review the House and Senate Tax Bills, advice came out on how to prepare going into year end. For those of you who attended our webinar last week, the updated agreement has affected many of the planning strategies we discussed. We’d like to address these first:
- The final version of the Tax Bill specifically contains language to preclude the use of a 2017 deduction from the prepayment of State and Local taxes.
- Whether one can prepay 2018 property taxes to get an increased deduction in 2017 is unclear. What is clear is that you will not be able to prepay the State and Local Tax (SALT) and take the deduction in 2017. We encourage taxpayers to consult with their accountant as to whether the SALT language covers property taxes.
- You will not be able to deduct interest from Home Equity Lines of Credit going forward, regardless of when you drew the money.
Tax Brackets and Rates
- The tax brackets we know for 2017 will not be in place for 2018. Currently, there are seven brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
- The proposed document suggests seven brackets, but with lower rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
- The final Tax Bill looks similar to the Senate plan.
- Capital gains rates are scheduled to stay the same, but one gets pushed into the top capital gains bracket at higher limits: $500,000 for single filers and $600,000 for joint filers.
- The 3.8% Medicare surtax remains in place, as part of the Affordable Care Act.
Exemptions and Deductions
- The Tax Bill eliminates personal exemptions.
- The elimination of personal exemptions is being met with a doubling of the standard deduction. The Standard Deduction will increase to $24,000 for those married filing joint and $12,000 for individuals.
- The child tax credit increased from $1,000 to $2,000, with a phase-out for those filing jointly earning more than $400,000.
- The combined deduction for State and Local income taxes, as well as property taxes, is $10,000.
- Mortgage interest is deductible on mortgages of $750,000 and below. The current law grandfathers all existing mortgages in place by December 15, 2017.
- Medical expenses above 7.5% of Adjusted Gross Income are now deductible; currently, the law sets a 10% floor and only 7.5% for those over age 65.
- The Tax Bill no longer permits miscellaneous itemized deductions in any form.
One of the biggest objections to the new Tax Bill is maintaining Alternative Minimum Tax (AMT). However, while AMT is still going to be in our tax code, significantly fewer people will get caught in the AMT net since there will be an increased exemption amount pertaining to AMT and many of the deductions that get added back to one’s income in the AMT calculation have been eliminated.
Below are highlights of just a few of the other nuanced changes in the proposed revisions:
- 529 plans – you can now use up to $10,000 per beneficiary from 529 plans for K – 12 education.
- The Tax Bill doesn’t make any changes to the caps, deductibility, or use of 401(k) retirement plans.
- After 2017, taxpayers can no longer recharacterize conversions from Traditional IRAs to Roth IRAs.
- The capital gain exclusion on the sale of a principal residence will remain the same as current law.
- The FIFO accounting method on stock sales that was included in the Senate plan will not take effect.
Lastly is the topic of estate tax law changes and planning:
Estate Tax Deduction
- In 2017 the estate tax exemption is $5.49 million per person.
- Under the new law, the estate tax exemption increases to $11.2 million per person.
- You can still step up cost basis at death.
The gift tax exemption still remains. Why is this important? Keeping the gift tax exemption as-is prevents people from making an unlimited amount of gifts to second and third generations. There is still a government backstop in place to tax assets as they are moved to the next generation. A full repeal of the gift tax exemption would likely result in a significant loss of revenue. Many people would simply fund Dynasty Trusts, to exclude any potential future estate and gift tax laws.
Many changes are taking place to the laws we know today, and still, uncertainty exists in what will be final law and what won’t. We recommend providing your Wealth Advisor with a copy of your most recent tax return and talking to your CPA to determine whether you should be considering any strategies between now and yearend, or any years going forward.
While this Tax Bill has been one of the biggest overhauls we’ve seen in 30 years, we will see more changes to come in 2025, when most of these provisions sunset.
Important disclosure information
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This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.