Tax Cuts and Jobs Act of 2017
This major tax reform will benefit corporations and the mega-wealthy beginning in 2018. For many individuals, the new law will add complexity. Most of the new provisions expire after December 31, 2025, at which time tax rules revert back to 2017 law. We’ve compiled a list of the changes that will likely affect our individual clients, along with a few planning strategies that can mitigate some of them. Stay tuned for more tax planning ideas, as additional implications of the new rules become known.
Elimination of State, Local, and Property Tax Deductions
Except for a total of $10,000 of taxes annually, you will no longer be able to deduct state, local, and property taxes. (The $10,000 limit includes all three of these items, combined.)
Decrease in Income Tax Brackets, Elimination of Personal Exemptions
Most people will be in a lower federal tax bracket starting in 2018. However, with the elimination of personal exemptions and many other tax deductions, it’s unclear whether the new tax law will be a net benefit or a tax disaster. The top tax bracket drops from 39.6% to 37% beginning at taxable income of $600,000 ($500,000 for single taxpayers). A hidden tax hike will occur over time, as annual tax bracket inflation adjustments will have smaller increases. Preferential rates for long-term capital gains and qualified dividends remain in effect, but the income level for those rates is redefined based upon specific dollar amounts, rather than adjusting them to individual tax brackets.
Elimination of Personal Home Equity Line of Credit Interest Deduction
Regardless of when you took out a HELOC, personal interest will no longer be deductible after 2017. However, if you use your HELOC only for “home acquisition indebtedness” and nothing else, such as paying off credit cards, the interest would be deductible (subject to the $1 million limit explained below). The HELOC must be used to buy, build, or substantially improve your main home or second home.
Planning Idea: Determine if combining your HELOC and primary loan into one new loan makes sense, especially if the combined new loan value is no more than $1 million.
Limit on Home Mortgage Interest Deduction
Interest on a new mortgage over $750,000 will not be deductible. However, existing mortgages of up to $1 million in place as of December 15, 2017, will still be fully tax deductible.
Planning Idea: Based upon your goals, risk tolerance, and investment portfolio allocation:
1) For those with loans of over $1 million, determine whether it makes sense to pay down the loans to $1 million.
2) For those purchasing a new home, determine whether to stay within the new mortgage thresholds, since the current law will expire after December 31, 2025.
Interest on a loan you take out when you buy a home is considered deductible financing, while a loan you take out subsequent to a purchase or a remodel would not be. Importantly, refinancing your mortgage in the future retains your $1 million debt limit, but only for the remaining debt balance (not for any new loans); this is one benefit of an interest-only loan.
Elimination of Miscellaneous Itemized Deductions
Prior to 2018, you could deduct items such as tax preparation fees, investment management fees, job hunting expenses, and the cost of a safe deposit box. These itemized deductions were deductible to the extent that they exceeded 2% of your adjusted gross income.
Planning Idea: If you own a business or rental property, deduct the tax and investment management fees relating to those specific activities on the respective schedules (Schedule C or E) of your tax return. Additionally, investment advisory fees for an IRA can be paid from an IRA, effectively using pre-tax dollars to pay the fee.
Changes to the Alternative Minimum Tax
The AMT exemption amounts are increased for individuals, and higher phase-outs of these exemptions will be implemented. Due to these changes, the limits on state, local, and property taxes, and the increased standard deduction, it’s likely fewer people will fall into the AMT.
Section 529 College Savings Plans
You can now use these plans to pay for elementary and secondary education, in addition to college expenses. Tax-free distributions of up to $10,000 can be used to pay for K-12 expenses.
Planning Idea: If you’ve over-funded your college savings plan, consider using the funds to pay for private school. However, if you expect your child to go to graduate school, you may want to keep the funds growing in the plan.
Increase in the Standard Deduction
While many itemized deductions are going away, the standard deduction is rising to $24,000 ($12,000 for singles).
Planning Idea: If you currently itemize and deductions are less than the new standard deduction, you may no longer need to keep records of those deductions. This could make your tax return simpler.
Increase in the Child Tax Credit
The child tax credit will increase to $2,000 per qualifying child and will be refundable up to $1,400 for lower-income taxpayers. The credit is subject to phaseouts, which are not indexed for inflation, for those with adjusted gross income of more than $400,000 ($200,000 for singles).
Increase in the Estate and Gift Tax Basic Exclusion
The estate tax exemption has been doubled from $5.5 million to $11 million. For 2018, the annual gift tax exclusion is $15,000 per recipient.