December 26, 2017

Overview

The House of Representatives and Senate passed their separate versions of the tax reform bill in November and December, respectively. Subsequently, the two houses of Congress sorted out their differences and reached a conference agreement on the final version of the Tax Cuts and Jobs Act and passed the conference agreement bill. Recently, the president has signed the bill into law.

The Tax Cuts and Jobs Act is the most comprehensive piece of tax legislation since the Tax Reform Act of 1986. While most provisions go into effect in 2018, a substantial portion impacting individual taxpayers is scheduled to expire (sunset) at the end of 2025. This makes planning crucial but also inherently means that flexibility in your planning is critical as you look towards tax planning in future years.

The list below is not all inclusive but is designed to highlight some of the most pertinent changes to our clients. Hopefully, this framework comparing current law to the provisions under the new law can facilitate your discussions with both your tax counsel and wealth advisor.

Individual Taxes

 

Current Law

New Law

Individual Tax Rates 7 Brackets: 10, 15, 25, 28, 33, 35, 39.6% 7 Brackets: 10, 12, 22, 24, 32, 35, 37%. Sunset after 2025
Standard Deduction $12,700 married filing jointly ($6,350 if single) $24,000 married filing jointly ($12,000 if single). Sunset after 2025
Personal Exemptions $4,050 each, subject to phase-out Repealed; Sunset after 2025
Top Capital Gains/Dividend Tax Rate 20% Unchanged from current law
Sale of Securities Specific Identification, first in first out (FIFO or average cost basis can be used on sales of individual securities where multiple positions are held by a taxpayer Unchanged from current law
Alternative Minimum Tax Parallel tax system – top rate of 28% AMT exemption amounts and phase-out thresholds are increased. Sunset after 2025
Limitations on Itemized Deductions Up to 80% of itemized deductions could be lost for high-income earners Repealed; Sunset after 2025
Mortgage Interest $1 million limit on acquisition indebtedness plus up to $100,000 of home equity line of credit. The dollar limit of $1 million can be combined on up to two residences in total The revised limit on acquisition indebtedness is reduced to $750,000 on up to two residences. Loans secured before Dec. 12, 2017, are grandfathered up to the prior $1 million limit. The deduction for interest on home equity indebtedness is repealed. Sunset after 2025

 

Individual Taxes (Cont.)

 

Current Law

New Law

Medical Expenses Unreimbursed medical expenses are deductible to the extent they exceed 10% of adjusted gross income (AGI) Retained but reduced to 7.5% of AGI until 2018. Reverts to current law after 2018.
State and Local Income and Property Taxes The deduction for state and local income and property taxes is allowed The combined deduction for state and local income, sales and property taxes is capped at $10,000.
Charitable Contributions Cash gifts to public charities limited to 50% of adjusted gross income with a five-year carryforward The maximum annual deduction for cash gifts to public charities would increase to 60% with a five-year carryforward. Also denies a deduction for college event seating rights
Casualty Losses Personal casualty losses are deductible to the extent they exceed the sum of $100 + 10% of adjusted gross income Casualty loss deduction would be eliminated except for those attributable to special disaster relief; Sunset after 2025
Child and Family Tax Credits Child tax credit for qualifying individuals of up to a $1,000 per child subject to phase-out for high-income earners Increased the child care credit to $2,000 with a phase-out for high-income earners. Added a $500 credit for non-child dependents; Sunset after 2025
Alimony Alimony is deductible by the payor and includable in income by the payee Eliminates the alimony deduction for the payor and no longer included in income by the payee for agreements executed after
Dec. 31, 2018
Home Sale Exclusion Up to $500,000 (married filing jointly) or $250,000 (single taxpayer) of gain can be excluded from income if the taxpayer owned and used the home as a principal residence for two of the previous five years and have not used the exclusion in the last two years Unchanged from current law
Qualified Retirement Account Contributions As is Unchanged from current law
Reversal of Roth IRA Conversions (Recharacterization) Permitted to reverse a conversion from a traditional IRA to a Roth IRA annually up to Oct. 15th of the following year Repealed
Medicare Surtax and Impact on the Affordable Care Act 3.8% tax on “net investment income” Unchanged; Reduces penalty to $0 effective in 2019 for the Individual Insurance Shared Responsibility Mandate under the Affordable Care Act ACA isn’t getting repealed; only the penalty

 

Individual Taxes – Education Incentives

 

Current Law

New Law

529 Savings Plans Funds contributed grow tax deferred and can be withdrawn tax-free for the beneficiary’s use for college and post-graduate education Same as current law but would also be available to fund elementary or high school tuition for the beneficiary up to $10,000 per annum.
American Opportunity Tax Credit (AOTC) 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000. Thus, the maximum annual AOTC is $2,500 for each eligible student Unchanged from current law
Student Loan Interest Deduction Deductible up to $2,500 per annum, subject to phase-out based on income Unchanged from current law

OBSERVATIONS – INDIVIDUAL TAXES – The increase in the standard deduction will likely mean that most taxpayers will no longer itemize their deductions. However, the loss of personal exemptions for larger families could offset the benefits of the increased standard deduction. Taxpayers in high income and property tax states could be negatively impacted. The reduction in allowable mortgage and home equity line interest would impact the affordability of a home for new purchasers and vacation homes. The potential impact of changes in the Alternative Minimum Tax may result in tax savings for some taxpayers; however, these tax savings must be weighed on an individual basis for each taxpayer based on their own personal tax situation. Additional flexibility afforded by the ability to use 529 plans toward elementary and secondary education should increase their utilization and benefits.

Wealth Transfer Taxes

 

Current Law

New Law

Estate Tax 40% rate, $5,600,000 Exemption in 2018 (indexed for inflation) Commencing 2018, exemption for estate tax doubled from $5.6 million to $11 million (indexed for inflation) with a 40% tax rate on excess. Sunset after 2025
Gift/Generation-skipping Tax (GST) 40% rate, $5,600,000 Exemption in 2018 (indexed for inflation) In 2018, exemption for gift and GST tax doubled from $5.6 million to $11 million (indexed for inflation). Sunset after 2025
Income Tax Basis Upon Death Step-up for estate property Unchanged from current law
Trust and Estate Tax Rates 5 Brackets: 15 ($0), 25 ($2,550+), 28 ($5,590+), 33 ($9,150+), 39.6% ($12,500+) 4 Brackets: 10 ($0+), 24 ($2,550+), 35 ($9,150+), 37% ($12,500+). Sunset after 2025

OBSERVATIONS – WEALTH TRANSFER – The increased exemptions of the estate and generation-skipping transfer taxes while retaining the step-up in income tax basis upon death will require review of all estate planning documents and enhanced flexibility therein but should allow for greater family wealth retention and legacies. The retention of the gift tax will likely require a more careful analysis of the benefits or drawbacks of making taxable gifts (in excess of the annual gift exclusion amount) going forward.

Business – Corporate Taxes

Current Law

New Law

Top C-Corporate Rate 35% 21%; Reduction in benefit of dividends received deduction
Alternative Minimum Tax (AMT) Parallel tax calculation with top rate of 20% Repealed
Business Investments Limited immediate expensing ($500,000); balance subject to depreciation Immediate expensing for qualified property acquired and placed in service through 2022 of up to $1 million (with additional year for certain property) and subject to a phase-out by 20% per year beginning in 2023.
Bonus Depreciation 50% bonus depreciation 100% bonus depreciation for five years
Interest Expense No limitation Limited to business interest income, plus 30% of a business’s adjusted taxable income; full deduction for small businesses with gross receipts of $25 million or less

 

Business – Pass-Through Entity Taxes

Current Law

New Law

Top Rate: Pass-Through Entities (S-corporations, LLCs, LLPs and Partnerships / Sole Proprietorships) Subject to tax at individual rates up to 39.6% Allows a deduction of up to 20% of domestic “qualified business income” from pass-through entities excluding most personal service entities with taxable income over $500,000 (married filing jointly). All other pass-through income would be taxed at ordinary income rates.

 

Observations – Businesses

The potential disparity in rates between C corporations and pass-through entities could prompt many businesses to re-examine their entity choice. These provisions should encourage businesses to temporarily increase equipment purchases while staying within the interest deductibility provisions.

Conclusion

Tax reform and the new-year represents a great time to re-examine your personal and business concerns and overall legacy to your heirs. Accordingly, we encourage you to get together with your tax counsel and Wealth advisor to more fully examine the impact of this new tax law on your financial plan. If you have questions about the impact of one or more of these changes on your personal situation, please contact your wealth advisor.

 

TAX CUTS AND NEW JOBS ACT – FEDERAL INCOME TAX RATES BEGINNING 2018:

Single Individuals

Not over $9,525 10% of the taxable income
Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000 $45,689.50 plus 35% of the excess over $200,000
Over $500,000 $150,689.50 plus 37% of the excess over $500,000

Heads of Households

Not over $13,600 10% of the taxable income
Over $13,600 but not over $51,800 $1,360 plus 12% of the excess over $13,600
Over $51,800 but not over $82,500 $5,944 plus 22% of the excess over $51,800
Over $82,500 but not over $157,500 $12,698 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $30,698 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000 $44,298 plus 35% of the excess over $200,000
Over $500,000 $149,298 plus 37% of the excess over $500,000

Married Individuals Filing Joint Returns and Surviving Spouses

Not over $19,050 10% of the taxable income
Over $19,050 but not over $77,400 $1,905 plus 12% of the excess over $19,050
Over $77,400 but not over $165,000 $8,907 plus 22% of the excess over $77,400
Over $165,000 but not over $315,000 $28,179 plus 24% of the excess over $165,000
Over $315,000 but not over $400,000 $64,179 plus 32% of the excess over $315,000
Over $400,000 but not over $600,000 $91,379 plus 35% of the excess over $400,000
Over $600,000 $161,379 plus 37% of the excess over $600,000

Married Individuals Filing Separate Returns

Not over $9,525 10% of the taxable income
Over $9,525 but not over $38,700 $952.50 plus 12% of the excess over $9,525
Over $38,700 but not over $82,500 $4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500 $14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000 $32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $300,000 $45,689.50 plus 35% of the excess over $200,000
Over $300,000 $80,689.50 plus 37% of the excess over $300,000

Estates and Trusts

Not over $2,550 10% of the taxable income
Over $2,550 but not over $9,150 $255 plus 24% of the excess over $2,550
Over $9,150 but not over $12,500 $1,839 plus 35% of the excess over $9,150
Over $12,500 $3,011.50 plus 37% of the excess over $12,500

The provision’s rate structure does not apply to taxable years beginning after Dec. 31, 2025.

While this summary is not an exhaustive list of all tax issues raised by each proposal, it is intended to provide an overview of the range of tax issues presented by the legislation. You should consult with your tax advisor or attorney when evaluating the tax proposals for your current and prospective tax planning.