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02/07/2018

Aspects of the 2018 Tax Cuts and Jobs Act

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The new tax plan will impact investors in many new ways. We will cover some of the more important aspects of the act and opportunities for 2018 tax year.

Rates, Exemptions and Standard Deductions

The new tax brackets for 2018 vs. 2017 are as follows:

2017

2018

10%

10%

15%

12%

25%

22%

28%

24%

33%

32%

35%

35%

39.60%

37%

There has been some rate savings at the top 6 brackets and the income ranges that correspond with them have gone up which should help lower potential tax liabilities over all income ranges. The $4,050 tax exemptions have been eliminated for the taxpayer, payer’s spouse, children and other dependents. The standard deduction has almost doubled from $6,350 to $12,000 for single filers, $12,700 to $24,000 for joint filers. 90% of the people who will claim the standard deduction will likely see a lower tax bill and complete simpler tax returns. However, their opportunities for tax planning will also be limited to self-employment, fringe benefit and some credit strategies. One example many are talking about is the tax filer with a home in the $200,000 or so range and a mortgage of $160,000 will likely claim the standard deduction now eliminating the need to itemize deductions and reducing the tax incentives of home ownership.

Itemized Deductions

Many itemized deductions have changed.

Deductible medical expenses have a new threshold of 7.5% of taxable income down from 10%. This threshold was lowered for tax years 2017, 2018 and 2019 under the act. This may create and opportunity to schedule discretionary medical procedures to 2018 and 2019 under this new threshold.

State and Local Income, Sales, and Real and Personal Property Tax

The deduction on a filers federal return has been limited to $10,000. For high tax states like California and New York this will impact filers negatively. States such as California are exploring ways to help minimize the impact of the state and local tax deduction cap with restructuring how tax payments are characterized to include the portion that is more than the cap as a charitable contribution.

Mortgage Interest Deduction

Existing mortgages are grandfathered in and subject to the previous cap on interest expense on acquisition indebtedness of up to $1 million dollars. Under the Tax Act new interest indebtedness for up to two homes is capped at $750,000 for loans from December 15, 2017 through 2025. Interest on home equity loans is no longer deductible after 2017 through 2025. This also adversely effects tax filers in high property value states such as California.

Charitable Contributions

The deduction for charitable contributions remains unlimited but the amount deductible in any given year is subject to certain percentages of Adjusted Gross Income (AGI) depending on the type of property contributed. Any excess remaining is carried forward to be used in future years. Charitable cash contribution limitations have increase from 50% to 60% of AGI under the new law.

Tickets and Seating

The deduction for payments connected to the purchase of tickets and preferential seating at athletic events has been repealed.

Casualty and Theft Losses

The deduction allowance for casualty and theft losses is now allowed only for presidentially declared disaster areas.

Miscellaneous Itemized Deductions

Tax preparation fees, investment expenses and unreimbursed employee expenses after 2017 are now disallowed. Filers with significant unreimbursed cost for things such as employee expenses, mileage, internet and phone charges and education expenses are recommended to request an excludable working conditions fringe benefit arrangement or accountable plan from their employer.

Phase-out of Itemized Deductions

The phase out of deductions after higher levels of adjusted gross income levels has been eliminated under the new plan. For filers who are single and married with itemized deductions close to standard amounts a “bunching” strategy with discretionary deductible expenses may provide a tax planning opportunity. Discretionary expenses may include charitable contribution, medical expenses and the state and local taxes below the new $10,000 capped amount.

Alternative Minimum Tax (AMT)

2017’s AMT exemption is $54,300 for unmarried individuals and $84,500 for married individuals filing jointly. This exemption was phased out at $120,700 for unmarried individuals and $160,900 for married individuals filing jointly. The new tax act significantly increases these exemption amounts to $70,300 for unmarried individuals and $109,400 for married individuals filing joint returns. The phaseout thresholds have also been raised significantly. New threshold levels are $500,000 for unmarried individuals and $1,000,0000 for married individuals filing jointly. The effect of this is that many filers who have lost out on deductions, especially due to the state and local tax deduction cap, may pay more regular tax but may pay less total tax because they will now avoid the alternative minimum tax.

Child and Family Credit

The child tax credit increase to $2,000 per qualifying child under the new plan. $1,400 is refundable. It also adds a $500 nonrefundable credit for other qualifying dependents. The phase out ranges for this tax credit have been greatly increased from $110,000 to $400,000 for married filers filing jointly and from $75,000 to $200,000 for all other taxpayers.

The “Kiddie Tax” and Trust and Estate Tax

The new tax act completely changed the tax on unearned income of children. No longer does the parents income or the income of sibling’s factor in. Earned income is taxed at unmarried taxpayer rates. Net unearned income is taxed according to more unfavorable rates that are applicable to trusts and estates. Trust and Estates earning from $0 to $2,550 are tax at 10%, $2,550 to $9,150 at 24%, $9,150 to $12,500 at 35% and more than $12,500 at 37%.

Section 529 Savings Plans

The utility of the funds in these plans has changed to now include the use of up to $10,000 per year for a child’s elementary and secondary education for public, private or religious schooling.

Estate, Gift and Generation-Skipping

Under the new tax act, the exemption for estate, gift and generation-skipping tax has gone from $5.6million to $11.2million per individual. For couples it is now $22.4million. The income tax basis step-up or step-down at death remains.

Roth Conversions

No longer can an individual reverse a Roth conversion by re-characterizing it. A person can continue to contribute to their Roth IRA and re-characterize those contribution to a Traditional IRA if it happens before the due date of their individual tax return for that year.

Alimony

The new law makes alimony and maintenance payments no longer deductible to the payor spouse or includible in the income of the payee spouse. Divorce settlement structures will certainly be impacted going forward.

Moving Expenses

The deduction for moving expenses is suspended under this law except for those in the Armed Forces (and their spouse and dependents) who are on active duty and move due to military order to a permanent change of station.

Before acting on any of the aspects discussed here, tax filers and investors should check with their accountants and advisors to make sure that their situation and needs are evaluated and proper advice specific to them is given.

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