We’re not accountants or tax specialists. However, we have been getting tons of questions about the new federal tax legislation (Tax Cuts and Jobs Act) which takes effect on Jan 1, 2018. So, with all appropriate caveats and qualifications, here are only some of the highlights that we get asked about the most, in plain English (the best that we can). Please (PLEASE!) consult your tax advisor as to how these tax law changes will impact your individual circumstances.
New Tax Brackets – This one is pretty straight forward. For the next 8 years (tax years 2018 through 2025) there will be 7 brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%). The thresholds vary based on how you file. In the vast majority of cases, these appear to be lower tax rates than 2017.
Standard Deduction – The standard deduction, which applies if you do NOT itemize your tax deductions, essentially doubled to $24k for married persons and $12k for single filers. This will mean that only a small percentage of the population will continue to itemize. Typically those who have at least $10k in state income taxes and real estate taxes, a large mortgage, or a lot of charitable contributions will still itemize. Others will just take the standard deduction.
Charitable Contributions – This hasn’t really changed with the new legislation. However, since you can only deduct charitable contributions if you itemize, a number of people are accelerating their charitable contributions to 2017, since they plan to no longer itemize in 2018 with the higher standard deduction.
Mortgage Interest Deduction – The limit on the size mortgage, on which you can deduct interest, is reduced from $1 million to $750k.
Child Tax Credit – For 2018 to 2025 the child tax credit increases from $1,000 to $2,000 per child.
529 Plans – The new legislation expands usage to include private elementary and secondary schools, up to $10k/child/year. Previously you could only use your 529 accounts for college/grad school.
State & Local Taxes (SALT) deduction – State and Local Taxes (like Real Estate taxes) have historically been deductible on your federal tax return. The new legislation limits the COMBINED SALT to $10k. This only impacts those who will itemize. It typically impacts those in high tax states, notably our beloved NJ, along with NY and CA. The IRS has already published a letter this week stating that you can ONLY prepay your real estate taxes if they’ve already been assessed. So, in our town of Voorhees, NJ for example, we’ve already received the assessment due Feb 1 and May 1 of 2018, which allows us to prepay them by 12/31 and deduct them from 2017 Federal taxes. For those who send in quarterly tax estimates, your 4th Quarter 2017 estimate, which is normally due January 15th of 2018, can be prepaid in 2017 as well, for the same effect. If you think this might help you, please check with your accountant or tax preparer. You will have to have your checks post marked by tomorrow (no mail on Sunday). Keep in mind that if you don’t itemize in 2017, this won’t help you. Also, if you typically get hit with AMT (alternative minimum tax), it likely won’t help you either. To add to an already complicated decision, note that the Governor’s of NJ, NY, and CA are feverishly searching for a remedy. One proposal includes turning the public school systems into a non-profit (501c3) so roughly half of the real estate taxes become charitable contributions. Another is to actually sue the federal government claiming that disallowing the deduction of state and local taxes is tantamount to double taxation and thus unconstitutional! Stay tuned for this one!
Estate Tax – The base estate and gift tax exemption doubles. For married couples this brings it to $22.4 million and $11.2 million for singles.
Corporate Taxes – The general corporate tax rate is being reduced permanently to 21%. This is the most significant change in the tax code from a monetary perspective. It’s expected to bring corporate operations back to the US from overseas, which is touted as a job creating change.
Pass-through Income Deduction – For small business, which are often structured as an S-Corp or LLC, there may be some deductibility of pass-through income. Eligibility may depend on type of business, level of income, and even employee wage base. This change was meant to help small business taxes stay pace with the change in the Corporate Tax code.
Medical Expense Deduction Threshold – Instead of needing at least 10% of your Adjusted Gross Income in Medical Expenses in order to itemize them, you’ll only need 7.5% of your AGI to do so. This reduction is only slated to be in effect for 2017 and 2018, then it is scheduled to revert back to 10%. If you’ll take the Standard Deduction in 2018, it won’t matter.
Alternative Minimum Tax (AMT) – The threshold for AMT tax will have a higher exemption amount ($109,400 for married filers vs. current $84,500). This, will mean that fewer people will get hit with AMT, especially since far fewer people are expected to itemize anyway. This increased exemption is in effect through 2025.
Affordable Care Act Mandate – Under current law there is what amounts to a so called “penalty” for those who don’t have a health plan that provided minimum essential coverage. This is essentially being repealed in the new tax legislation.
Hope that helps! As always, if you or your friends/family need assistance with financial planning or asset management, please let us know!
-Friedenthal Financial Team