Below is a condensed summary of some of the most important changes from the recent tax reform bill.
New Marginal Tax Brackets & Expanded Thresholds
Who is affected? All taxpayers.
What changed? The seven old marginal brackets of 10, 15, 25, 28, 33, 35, and 39.6% have been replaced by seven new brackets of 10, 12, 22, 24, 32, 35, and 37% and the thresholds for the 22% bracket and above have been increased. For illustrative purposes, the top tax bracket increased from $426,700 single / $480,050 MFJ at 39.6% to $500,000 / $600,000 at 37%, respectively.
Higher Standard Deductions and Elimination of Personal Exemptions
Who is affected? All taxpayers.
What changed? Exemptions were eliminated (the $4,000 you would take for yourself, a spouse, dependents, etc.) and replaced by higher standard deductions. These are $12,000 for individuals, $24,000 for married couples, $12,000 for married filing separately, and $18,000 for heads of household.
The Threshold to Itemize has Essentially Been Raised
Who is affected? Those who previously itemized or would have been potentially eligible to itemize in the future.
What changed? Due to the increased standard deduction, less Americans will be eligible to itemize. In fact, it is estimated that only 10% of Americans will be itemizing their taxes going forward.
Adjustments to the Mortgage Interest Deduction
Who is affected? Those with debt on a primary residence.
What changed? In years past, taxpayers could deduct interest on up to $1 million of home acquisition indebtedness. This amount has been lowered to $750,000 for loans established after December 15, 2017. It is important to note that the determination of acquisition indebtedness is not based on structure or title, but instead on how the proceeds were used (specifically, the debt has to be used acquire, build, or substantially improve the taxpayer’s primary residence and be secured by said residence).
In addition, the ability to deduct $100,000 in other type of home equity loans (specifically, loans that are not used to substantially improve the residence) has been completely repealed.
Important note: HELOC or home equity loans can still qualify if secured for the reasons mentioned above.
Education Tax Breaks Expanded
Who is affected? Owners of Section 529 College Savings Plans.
What changed? Previously, 529 plans could only be used to pay for qualified higher education expenses for the distributions to be considered tax-free. Under the new law, up to $10,000 per year per beneficiary can be used for K-12 tuition (this includes, public, private, and religious institutions).
Charitable Deduction for Cash contributions Increased
Who is affected? Taxpayers who contribute cash to charity.
What changed? Previously, taxpayers who made a cash donation to a qualifying charity could deduct that amount from their taxes up to 50% of adjusted gross income (AGI) and carry the remainder to future years. You can still carry the rest forward, but now you can deduct up to 60% of AGI.
Threshold for Medical Expense Deduction Reverts Back
Who is affected? Taxpayers with significant medical expenses.
What changed? For quite a while, the medical expense deduction threshold sat at 7.5% but in 2013 was raised to 10% for those younger than 65. With the new tax law, this threshold has reverted back to the previous percentage, but the opportunity to deduct these expenses will still be limited due to the increased standard deduction.
State and Local Taxes (a.k.a. “SALT”) Deduction Reduced
Who is affected? Taxpayers that live in high income-tax states.
What changed? In years past, individuals and families in high-income states (i.e. New York, Connecticut, etc.) were able to deduct their significant SALT taxes from their federal tax return, which helped to offset the burden of what they were paying “locally.” Now, this deduction has been reduced to $10,000 including income, sales, and property taxes which will greatly reduce the impact of this tax break.
Individual Healthcare Mandate Repealed
Who is affected? Individuals and families who do not have healthcare coverage.
What changed? Under the Affordable Healthcare Act (ACA) or “Obamacare,” individuals who did not have coverage through their employer, and who otherwise had no personal coverage, were assessed a penalty. Under the new tax law, the individual mandate has been abolished for 2019 and beyond and taxpayers will no longer be penalized if they are uninsured or underinsured after this point.
Reworked Alternative Minimum Tax (AMT)
Who is affected? Taxpayers who have been, or would have potentially been, subject to AMT.
What changed? Up to this point, the AMT exemption amounts had not been indexed to inflation so over time, more and more taxpayers became subject to this secondary, or “alternate,” tax system. As this was never the intention and was only meant to impact wealthier Americans, the new tax law permanently adjusted these thresholds for inflation.
Increased Estate Tax Exemption
Who is affected? Individuals and married couples with significant net worth
What changed? In 2017, the estate “exemption” was the highest it had ever been – $5.59 million per individual (or $11.18 for married couples). Beginning in 2018, that amount increased to $11.18 million for individuals (or $22.36 for married couples). In addition, “portability,” originally enacted in 2010, remained in-tact Prior to 2010, individuals had to establish Credit Shelter or “bypass” trusts to pass on, or transfer, any unused exemption amount; with portability, this is automatic.
Elimination of Roth Re-Characterizations
Who is affected? Taxpayers who plan on converting their Roth IRAs.
What changed? Previously, if a taxpayer converted all or a portion of their Traditional IRA to an IRA and the underlying investments wound up losing value they had until October 15th of the following year to “re-characterize” or essentially reverse the transaction and recoup those tax dollars. Now, any conversions made in 2018 and beyond cannot be re-characterized.
Important note: If you converted in 2017, you can still re-characterize by October 15th of this year.
Corporate Tax Rates Cut; Now All Profits Taxed at a Flat 21%
Who is affected? Corporations.
What changed? In past years, corporations have paid marginal taxes ranging from 15 – 35%. Under the new legislation, corporations will now be taxed at a flat 21% rate.
Change to the Way Passthrough Business Income is Taxed
Who is affected? Sole proprietors, partnerships, limited liability companies (LLCs), and S-corporations
What changed? Beginning in 2018, the above taxpayers can deduct 20% of passthrough income; for an oversimplified example, if your small business generated $500,000 in income, you could deduct $100,000 before ordinary income taxes would be applied.
Important note: Income phaseout limits will apply to those in “professional services” businesses, i.e. lawyers, doctors, consultants.
Some Deductions Nixed Altogether
Who is affected? Large percentage of taxpayers.
What changed? The following can no longer be deducted:
- Casualty & theft losses (other than those in a federally-declared disaster)
- Unreimbursed employee expenses
- Tax preparation fees
- Moving expenses
- Miscellaneous itemized deductions subject to 2% of AGI
- Employer-subsidized parking and transportation
- Investment management fees
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DISCLAIMER: Any opinions are those of the author and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. You should consider allof your available options and the applicable fees and features of each option before moving your retirement assets. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
As with other investments, there are generally fees and expenses asasociated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implicaitons can vary significantly from state to state.