President Trump Signs Tax Cuts and Jobs Act of 2017
On Wednesday, Congressional Republicans approved the final version of the Tax Cuts and Jobs Act of 2017 and sent the bill to President Trump for signature. It’s still undetermined when the President will formally sign the legislation, but when he does it will represent the most sweeping change to the US tax code in more than 30 years. While a large part of the legislation results in substantial tax reform for corporations (notably, reducing the corporate tax rate from 35% to 21%), the bill also marks major changes in tax policy for individuals and pass-through business entities.
For individual taxpayers, the bill will result in overall lower tax rates starting in 2018, but also allow for fewer deductions than current tax law. For a detailed analysis and chart on the Tax Cuts and Jobs Act, check out the Tax Policy Center website (http://www.taxpolicycenter.org/feature/analysis-tax-cuts-and-jobs-act). We wanted to briefly highlight some of the noteworthy items in the legislation as well as discuss some year-end planning strategies:
- The legislation keeps 7 tax overall tax brackets but reduces the overall rates and increases the income threshold to reach the higher rates. The top tax bracket is reduced from 39.6 percent to 37 percent.
- The alternative minimum tax (AMT) exemption is increased significantly, meaning that fewer households will be subject to AMT tax.
- Deduction for real estate, property and state/local taxes will be capped at $10,000 for both single and joint filers.
- Interest payments on up to $750,000 of new acquisition debt are deductible (reduced from current threshold of $1.1M). Those with existing debt above $750,000 - but below $1.1M - will still be able to deduct their interest. This new cap only applies to new acquisition indebtedness.
- The standard deduction is almost doubled from current law to $12,000 for individual and $24,000 for joint filers. This increase, coupled with fewer allowable itemized deductions, means that most US taxpayers will NOT itemize deductions starting in 2018.
- The child tax credit was expanded to $2,000 per child with the phaseout not beginning until $400,000 of AGI (up from $110,000 under current law).
- The medical expense deduction allows for deductions in excess of 7.5% of AGI in 2018, although that number will increase to 10% of AGI starting in 2019.
- The tax bill made no changes to current capital gains tax rates.
- The law now allows for 529 college savings plans to be used towards private school tuition for grade school and high school. There is a $10,000 annual withdrawal limit per child for payments towards grade school and high school tuition.
- Alimony payments starting in 2018 will not be taxable to the recipient or deductible by the payor. This only applies to new divorce agreements. Agreement finalized before the tax reform are grandfathered under the old rule (taxable to recipient, deductible by the payor).
- The estate tax exemption was increased from $5.6M per individual to $11.2M, meaning that a married couple now has $22.4M to shield from any federal estate tax exposure.
- The bill repealed the individual mandate requirement for health insurance that was established under the Affordable Care Act.
Year-End Planning Opportunities
As the bill’s details have come into focus over the past few days, we have spent time reviewing client plans to determine year-end tax strategy. With lower tax rates starting in 2018 and fewer allowable deductions, traditional year-end tax planning opportunities especially apply for the final weeks of 2017. These opportunities are to 1) delay income, if possible and 2) accelerate tax deductions. For those individuals who will NOT be subject to AMT on their 2017 taxes, we recommend making estimated state tax payments before December 31st (in order to be able to deduct them on your 2017 return) and to also consider prepaying 2018 property taxes, if allowed by your local county. In addition, those with planned charitable intentions for 2018 might consider accelerating contributions into 2017 in order to fully realize the tax benefit. Please contact our office or reach out to your CPA if you have any questions or if you’d like to discuss any year-end planning strategies.