Updated Tax Code & Planning for the Future
The following is an overview of impact of TCJA for tax year 2018. Some of the following information is provided by local accountant, Richard Fox, and financial commentator, Michael Kitces.
1. The 10% bracket remains unchanged, while the 15% bracket declines to 12%, the 25% to 22%, the 28% to 24%, the 33% to 32%, the 35% holds steady, and the 39.6% slips to 37%. The thresholds are modestly adjusted above the new 22% bracket.
2. The standard deduction nearly doubles to $12,000 for single filers and $24,000 for married filers, reducing the incentive to itemize and simplifying for some taxpayers. While many tax filers will no longer itemize deductions, it is still recommended to do the math to see which option fits your situation the best. For example, if you have a home mortgage, high medical expenses, and/or contribute to charities it may make sense to itemize your deductions. The filing status (Single, Married Filing Separately, etc.) chosen will also influence the deduction option.
3. The $4,150 personal exemption is eliminated, and the $1,000 child tax credit doubles to $2,000. In general, rules for charitable contributions remain unchanged.
4. Those in high-tax states could see the biggest hit, as there will be a $10,000 cap on state, local and property tax deductions.
5. For investors, the preferential treatment for long-term capital gains and dividends remains intact, as is generally the case for retirement accounts.
One important change – the new law repeals rules that allow for recharacterizations of Roth conversions back into traditional IRAs. Once you convert into a Roth, there’s no going back.
6. The 3.8% Medicare surtax on investment income for high-income taxpayers was retained. Since the levy entered the tax code, we have crafted strategies that reduce its bite; however, the tax survived tax reform and is likely to remain a permanent feature of the tax code going forward.
7. The AMT for individuals was not repealed, but exemptions have been widened.
According to the Tax Foundation, Congress passed the AMT in 1969 after the Secretary of the Treasury said 155 people with adjusted gross income above $200,000 had paid no federal income tax on their 1967 tax returns.
The AMT was never adjusted for inflation and grew into an onerous feature for many Americans. In inflation-adjusted terms, those 1967 incomes would be roughly $1.2 million in today’s dollars.
Ideally, it would have been eliminated from the tax code. But Michael Kitces points out, “While the AMT commonly impacted those around $150,000 to $600,000 of income, in the future, AMT exposure will be much smaller, and it will be extremely difficult to be impacted at all, especially given more limited deductions.”
8. The estate tax survived, but the exemption will double from $5.6 million to $11.2 million, and $11.2 million to $22.4 million for couples.
9. The deductibility of alimony paid is in place for 2018, but eliminated in 2019. Any alimony received is also affected.
10. The new tax bill also repeals the Obamacare mandate that requires all individuals to obtain health insurance. It becomes effective 2019.
11. And for businesses: Given that the 21% corporate tax rate applies only to C-corps, there will be a 20% deduction for pass-through entities, such as S-corps, partnerships, and LLCs. This change is seen by many as a welcome benefit for business owners, but complex rules may limit the pass-through for some entities.
Finally, it’s important to point out that many of the more popular changes in the tax code for individuals will sunset in 2025. While many may eventually be made permanent, as we saw with the Bush tax cuts of 2001 and 2003, there’s no guarantee this will happen again.