Changes Are Here

As we wrap up the year, there is an important bill that passed into legislation this week that will have financial implications for millions of American taxpayers. The list below details what kind of changes can be expected for both individuals and businesses.

BUSINESSES

CORPORATE TAX RATE: Falls to 21 percent from 35 percent.

PASS-THROUGH BUSINESSES: Creates a 20 percent business income deduction for owners of pass-through businesses, such as partnerships.

CORPORATE MINIMUM: Repeals the corporate alternative minimum tax, which was set up to ensure profitable companies pay at least some federal tax.

INDIVIDUALS

INDIVIDUAL INCOME TAX RATES:

PERSONAL EXEMPTIONS: Under the new law, the standard deduction and personal exemption are consolidated and expanded into a single larger standard deduction. The new deduction will be $12,000 per individual and $24,000 for married couples.

CHILD TAX CREDIT: Child Tax Credit is expanded from $1,000 per qualifying child under the age of 17, up to $2,000 per qualifying child. The phase out rules for the credit have been expanded from the current threshold of $75,000 per individuals and $110,000 for married couples, up to $200,000 for individuals and $400,000 for married couples.

PERMANENCE: The expectation is individual tax rates will snap back to current levels in less than 10 years.

STATE AND LOCAL TAX (SALT): Individual deduction for state and local tax payments by limiting it to property-tax payments and capping it at $10,000. Any 2018 state income taxes paid by the end of 2017 are not deductible in 2017 (and instead will be treated as having been paid at the end of 2018). However, this restriction applies only to the prepayment of income taxes (not to property taxes), and applies only to actual 2018 tax liabilities, which means it is still permissible to pay 4th quarter 2017 estimated taxes by the end of 2017 (and not in early January of 2018) to obtain the 2017 deduction.

MORTGAGE INTEREST: Caps the mortgage interest deduction at $750,000 in home loan
value, down from the current $1 million.

HELOC DEDUCTABILITY ELIMINATED: Changes the law that allows the interest incurred from a HELOC for expense other than home improvement to be deducted against taxable income.

ESTATE TAX: Roughly doubles the exemption from the federal estate tax on inherited assets to about $11 million.

CAPITAL GAINS & QUALIFIED DIVIDEND RATES: There is no change to the underlying rates in the new bill, but the income thresholds for the capital gains and dividend rates have are shifted based on the new individual and joint income levels. The 3.8% Medicare surtax on Net Investment Income still applies to the top bracket, producing a maximum capital gains rate of 23.8%.

OTHER PROVISIONS

OBAMACARE MANDATE: Repeals a federal fine imposed on Americans under Obamacare for not obtaining health insurance coverage.

529 EDUCATION: Revisions to the current law will allow 529 accounts to be used for any education expense, from elementary to college. Pre-college expenses are limited to $10,000 per year.

INVESTMENT EXPENSE DEDUCTION: The law allowing for the deduction of investment management fees and tax preparation fees has been eliminated.

CHARITABLE CONTRIBUTION LIMITS EXPANDED: Raises the threshold for cash donations to public charities and private foundations from 50% to 60%. This will also have an affect on those who made large charitable contributions in the past and may help release existing carry-forward deductions under the new higher limit.

The changes to the tax code will be incorporated into our clients’ individual plans to help ensure that they are well prepared to handle any changes in the tax code, so that they may sustain their current financial trajectory in order to meet their long term financial goals.

If you have any questions or concerns about the pending legislation and how that could affect your financial goals, please feel free to reach out to Rather & Kittrell.