The Tax Cuts & Jobs ActSubmitted by Karstens Investments on February 6th, 2018
By Ryne Bessmer, AIF®
On December 22, 2017, President Donald Trump signed into law the Tax Cuts and Jobs Act, which is the most signi cant overhaul of the U.S. Tax Code in more than 30 years. Loads of press out- lets and news articles have come out with their opinions on the social and political effects that these new laws will have. Below are listed a few of the changes and the ways we think they might nancially impact you and your family.
New Tax Rate
The new law keeps the seven income tax brackets but lowers tax rates. Employees will see changes re ected in their with- holding in their February 2018 paychecks. The rates revert back to the 2017 rates in 2026. The following charts de ne the new tax rates. The income levels will rise each year with inflation. But they will rise more slowly than in the past because the Act uses the chained consumer price index. Over time, that will move more people into higher tax brackets.
Standard Deduction Raised
For years, a common tax question has been whether or not you should itemize your deductions. Under the new law, many will nd they no longer need to itemize because the standard deduction has been drastically increased from $13,000 to $24,000 for married couples ling jointly and from $6,500 to $12,000 for singles. The changes to state tax and real estate deductions will also affect American’s ability to itemize.
Elimination of Personal Exemptions
With the standard deduction being raised as much as double, some of the other tax rules that families are used to faced the chopping block. One of these was the personal exemption (val- ued at $4,050 per tax payer, spouse and dependent in 2017). These changes, like others, are only in effect until 2025.
Real Estate Tax/State Tax Deductions Limited
The tax reform act limits the deductibility of state income tax, real estate taxes and sales taxes to a combined total of $10,000. This change along with the increase in the standard deduction is causing many individuals and families to realize that it may not be as beneficial for them to itemize deductions as it has been in the past. Make sure you speak with a CPA to determine the best strategy for you or your family.
Enhancing the Child Tax Credit
Under the new legislation, tax credits for children have increased from $1,000 to $2,000. Families with children under the age of 17 at the end of the year are eligible for this credit, but it is phased out for families earning more than $400,000. Early proposals in this legislation lobbied to increase the age to 18, but this did not make it to the nal bill. Additionally, there is now a $500 credit for qualifying dependents not eligible for the $2,000 child credit.
Changes to Your Mortgage
Before this new tax legislation, families were allowed to deduct interest expense paid on up to $1,000,000 (for married couples) of home equity debt on a primary residence. These interest expenses will no longer be deductible with the new tax legislation. Families will still be able to deduct the interest on mortgages for principal residences, but the debt cap that used to be $1,000,000 has now been lowered to $750,000. It is important to note, how- ever, that those who purchased their principal home before December 15, 2017, will be able to still use that higher $1,000,000 cap. This change is significant because it may impact a family’s decision on whether they should purchase a home, since this legislation effectively increases the cost of the loan.
Moving Expenses Eliminated
In the past, workers were allowed to deduct any moving-related expenses, but that has all changed under the new tax law. Any expenses for work-related moves have been eliminated (except for people in the military).
Elimination of Certain Miscellaneous Itemized Deductions
The new tax legislation eliminates the deductibility of tax preparation fees, appraisals for charitable gifts, safety deposit box fees, and investment advisory fees.
Tickets to Sporting Events
One popular deduction that Americans are used to taking advantage of is the the ability to deduct 80% of an amount donated to a university in order to acquire the right to purchase tickets to the university’s sporting events. That deduction is no longer going to be available starting in 2018.
Impacts to Charitable Giving
Many Americans are arguing that this tax-overhaul will raise the price of charitable giving for millions and fear that it will reduce the amount of money that the nation gives. The biggest reason that many expect charitable giving to decline is because of two key features: the significant boost to the standard deduction and cutting the top marginal tax rate. Keep in mind that the new legislation did not make any changes to the deductions for charitable gifts, but other aspects of the legislation such as the standard deduction will impact how far charitable deductions will go to reduce your taxes. Because many tax brackets are shifting lower, many taxpayers will nd themselves requiring fewer deductions in the coming years, thus making it less advantageous to make chari- table contributions. This of course does not take into account the millions of people who give out of their hearts, and not just for tax reasons. Remember, if you are taking the standard deduction in 2018, you will not be able to deduct your charitable contributions.
Enhancements to ABLE accounts
ABLE (Achieving a Better Life Experience Act) accounts are tax- advantaged savings accounts for individuals with disabilities and their families. Founded in 2014, these accounts cap annual contributions at the annual gift exclusion amount (now $15,000) and are not deductible, but earnings in the account are tax-deferred and can be tax-free if withdrawn for qualified disability expenses. The new legislation allows ABLE beneficiaries to contribute their own earnings to the account once the $14,000 limitation is reached due to gifts from others. Contributions from the beneficiary will also qualify for the saver’s tax credit. Additionally, 529 accounts where a disabled individual is the beneficiary can now be rolled into an ABLE account owned by the same individual. Keep in mind that this rollover will count towards the annual contribution limit to the ABLE. This particular piece of the legislation will expire after 2025 and revert back to the laws of 2017.
Estate Tax and Gifting Expanded
Among the many significant changes is an increase in the federal estate, gift and generation-skipping transfer tax exemption limits. It is important to note that these limits only extend from 2018 through 2025. Before this tax overhaul, the individual tax exemption was $5.49 million per person ($10.98 million per couple), and the new law now increases it to $11.2 million per person ($22.4 million per couple). The law also states that the exemption will be adjusted every year for inflation. Why is this significant? Well, it means that individuals and couples are now able to transfer more than twice the assets to their children and grandchildren without the burden of taxation or the need to utilize complicated and expensive trust arrangements. Again, this increased exemption is set to expire on December 31, 2025 and revert back to the 2017 levels mentioned above if further Congressional action is not taken before then. The new law does not affect the annual gift tax exclusion amount, other than increasing it for inflation from $14,000 to $15,000 per person.
Section 529 Plans Will Be Expanded
For our clients, 529 plans have become a very popular way to save for college, whether that be for children or grandchildren. Many families who previously used this section of the tax code and have younger children will be pleased to know that it has been expanded to include private K-12 schools. According to the Federal Government, families can now use up to $10,000 per year towards these costs. Nebraska’s State Treasurer recently announced that he will seek to block this legislation in Nebraska, as it would significantly reduce revenues. According to a story in the Omaha World Herald, Nebraskans should not assume K-12 expenses are approved for 529 Plans until the State Legislature makes an official ruling on it. As an additional note, the commonly used education tax breaks like the American Opportunity and Lifetime Learning tax credits were retained by the tax reform act, so be sure to continue to include these in your education savings plan moving forward.
Roth IRA Conversions
Prior to the new tax legislation, individuals and families could convert an IRA to a Roth IRA, and in the future if that conversion needed to be undone, it could be “recharacterized” back to a traditional IRA. Under the new tax law, these recharacterizations from Roth to Traditional IRA have been eliminated.