How does the new Tax Cuts and Jobs Act of 2017 affect you?

With the 2017 tax filing season underway finishing up your 2017 tax year, we begin to look at 2018 and how changes in the new Tax Cuts and Jobs Act of 2017 will affect you.

Although, the new tax reform is not exactly what was originally proposed to the American people (corporate tax rate at 15% and tax rules simplification (filing your taxes on a postcard)), we now do have legislature that will hopefully accomplish what is was created for; a competitive US tax rate compared to the rest of the world and increased US economic growth. Whether you agree with the changes or have doubts about its effectiveness, we will leave that debate up to economists and future economic statistics.

As Certified Financial Planner(CFP®) professionals who specialize in wealth management for pre retirees and retirees, taxes are an integral part of a client’s financial plan.  Besides being a legal requirement for all citizens and residents, taxes are a big part of financial decisions made in investment management (capital gains), retirement income optimization (taxable/tax free income sources), and estate and legacy planning (Estate and Gift Taxes.)   

Every taxpayer’s individual personal tax situation will be different depending on filing status, number of dependents and adjustments/deductions, etc.  Accordingly, you should be prepared for the new tax changes in 2018 and plan to avoid any unexpected surprises, such as having to write a large check at the end of the year.  You might want to get an estimate of how this law affects your personal tax situation for 2018 and make sure that you have the right withholding after the recent Federal tax withholding charts get implemented. If you are retired, you may want to review your tax withholding from your pensions, IRA distributions or Social Security as you are the one that elects your voluntary tax withholding as these payments are received.  This percentage may need to be changed if you previously had large itemized deductions that may be reduced.

Our initial estimates suggest that a majority of individuals will see their tax liability reduced, primarily as a result of the significant changes in the tax bracket structure and the and increased standard deduction amount.  This will not apply to everyone, but certainly the majority of taxpayers will see a benefit from the new tax law.  

Business tax changes include a reduction in the corporate tax rate from 35% to 21% (some previous deductions and credits are reduced or eliminated), a 20% deduction for small businesses that are pass through institutions like sole proprietors, partnerships and S-Corporations (special rules apply for types and income limits), quicker cost recovery or expensing, and repeal of the Corporate Alternative Minimum Tax (AMT.)

The biggest changes to personal taxes include lower tax brackets (highest rate in 2018 is 37% versus 39.6%, higher standard deductions ($12,000 Single, $18,000 Head of Household, and $24,000 for Married Filing Jointly), higher child tax credit with higher income limit threshold for use ($2k/child versus previous $1k/child, which may include a credit for a non child dependent and higher refundable amounts), loss of previous personal exemptions, loss of moving expenses deduction (now only eligible to active duty military personal,) new calculation of inflation (C-CPI versus CPI), change in the taxation of alimony(no longer deductible by payor or taxable to payee), higher Alternative Minimum Tax (AMT) exemption, estate tax exemption amount increase ($11.2 million/per individual versus old $5.49 million/individual), repeal of the ACA individual mandate in 2019 (individuals will no longer will pay a penalty in 2019 if they do not have health insurance), disallowance of recharacterizations of Roth conversions, use of 529 plans for K-12 education, and multiple changes to itemized deductions, which are below.

Changes to Itemized deductions include lower medical expense threshold in 2017 and 2018 (7.5% for everyone but goes back to 10% in 2019), state and local taxes (now capped at $10k/year), casualty and theft losses only if they are in a federally declared disaster area, mortgage interest deduction limited to $750k(for new loans starting in 2018),  increase in the annual limit for charitable contributions (60% of Adjusted Gross Income instead of 50%), and miscellaneous deductions over the 2% threshold are completely eliminated which included employee related business expenses not paid by employer, job searching and education, tax preparation and investment management fees. There is no more reduction in itemized deductions for high income individuals which used to be called the PEASE limitation.

A couple of items that don’t get a lot of press but are important to note include retaining lower qualified dividend and capital gain rates and the additional standard deduction for individuals over the age of 65 or those who are blind. Keeping the lower qualified dividends and capital gains rates, although not exactly by tax brackets anymore, a taxpayer would still pay 0% on qualified dividends and capital gains up to a certain income level (the 15% qualified rate in 2018 starts at $77,200 for Married Filing Jointly, $51,700 for Head of Household, and $38,600 for Single.)  There is also an additional standard deduction for someone that is blind or over 65, $1,300 each for Married Filing jointly or $1,600 for single taxpayers ($24k standard deduction increases to $26.6k for a couple both over 65.)

For comparison, below in the chart are different tax estimates that compare the 2018 old tax rules and the new rules from the Tax Cuts and Jobs Act. Basic assumptions include $100k gross income with no qualified rates on investment income (qualified dividends and long term capital gains.)  For your own estimate on how the new Tax Cuts and Jobs Act affects you, use an online calculator like the one at the Tax Foundation,

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements. 

Investment advisory services offered through PARAGON Wealth Strategies, LLC., a registered investment adviser.  Ed Acker, CFP®, is a Financial Advisor with PARAGON Wealth Strategies, LLC.  Please see his bio here.