The Tax Cuts and Jobs Act that emerged from the conference of House and Senate Republicans and was signed into law by President Trump makes many significant changes to the nation’s tax code. Some are intended to be permanent, while others will expire after 2025 unless renewed. What’s in the new tax bill? And how will the latest changes in our tax code affect you? We’ve prepared a summary of some of the key tax changes for 2018 and the years ahead.
Please note that as of publishing this, the IRS still hasn’t released official documents and our financial planning tax projection software has not been updated to match the law, so what follows is still subject to final interpretation (if there is such a thing in tax law).
Tax Brackets for Individuals
Current law calls for seven rates ranging from 10% to a maximum of 39.6%.
Current vs. New Bill retains existing 7 tax brackets, but at lower rates.
Source: Tax Foundation
Capital Gains Tax Brackets
Current law for long-term capital gains and qualified dividends will continue under the old thresholds. As a result, the rates no longer line up cleanly with the revised ordinary income tax brackets.
• 15% income tax bracket or lower: 0%
• 25-35% bracket or lower: 15%
• 39.6% bracket or lower: 20%
Under the new tax bill:
Tax credit doubles from $1,000 to $2,000 for each child under 17. Phase-out Adjusted Gross Income (AGI) rises from $75,000 to $200,000 for singles and $110,000 to $400,000 for married couples. The refundable portion of credit is capped at $1,400.
Personal Exemptions/Standard deductions
Under the new bill all personal exemptions are eliminated. Instead, the standard deduction increases from $6,350 to $12,000 for singles and $12,700 to $24,000 for married couples. The additional deductions for 65-or-over or blind taxpayers remain.
Itemized Deduction Phaseout
Under the new bill the phaseout is repealed.
Deductibility of State Income and Sales Taxes
Under the new bill this deduction is capped at a combined $10,000 for total state, local income, and property tax.
Mortgage Interest Deduction
Under the new bill the deductible mortgage interest debt limit on new mortgages taken out after December 15th, 2017 drops from $1 million down to $750,000. The $100,000 home-equity loan interest allowance limit is no longer deductible.
Miscellaneous Itemized Deductions
Under the new bill all the miscellaneous deductions are eliminated, including tax-prep and investment fees, union dues and unreimbursed business expenses, to the extent the total amount that exceeded 2% of your AGI.
Charitable Contributions Deduction
Under the new bill the deductibility limit rises from 50% to 60% of your Adjusted Gross Income (AGI).
Under the new bill there are no changes to this tax treatment until 2019. After which, alimony payments will not be deductible by the payor, and will not be taxed by the payee.
Alternative Minimum Tax for Individuals
Under the new bill:
The exemption increases from $54,300 to $70,300 for singles and $84,500 to $109,400 for joint filers. The phase-out threshold rises from $120,700 to $500,000 for singles and from $160,900 to $1 million for joint filers.
Estate/Gift Tax Exemption
The new bill raises the threshold for estate tax from $5.6 million to $11.2 million per individual in 2018.
Penalty for Failing to Purchase Health Insurance
The new bill eliminates the “individual mandate” of maintaining “minimum essential health insurance coverage” starting in 2019.
General Tax Changes for Business
Treatment of Pass-Through Business Income
Under the new bill pass-through businesses may be able to deduct the lesser of 20% of “Qualified Business Income” or 50% of the total wages paid by the business to its employees, with the remaining income taxed at individual rates. For those in a personal-service business, such as doctors and lawyers, this deduction is only available for income under $315,000 for married couples and under $157,500 for single filers. Pass-through businesses may include partnerships, LLCs, S Corporations, and sole proprietorships filing Schedule C. “Qualified Business Income” excludes certain income such as “reasonable compensation” to an S corporation owner-employee and investment income.
C Corporation Tax Rate
Under the new bill lowers C Corporations from a graduated tax rate of 35% down to 21%.
Corporate Alternative Minimum Tax
Under the new bill the corporate AMT is eliminated.
Net Operating Losses
The new bill eliminates the 2-year carryback of net operating losses incurred after 2017, and limits their offset to 80% of taxable income, but allows indefinite carryforwards (previously limited to 20 years).
Discuss Your Tax Implications with EP Wealth Today
The effects of the new tax bill vary significantly from family to family and are still subject to IRS interpretation. Please ask your EP Wealth Advisors for an objective assessment of how these changes may impact your financial plan.
Our review is limited to and in association with financial planning. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professionals.
The tax code is a complex set of rules and regulations that are difficult to decipher. For this reason, the information presented herein is very limited in nature and intended to provide a very general and brief outline of our understanding of major changes to the tax code as a result of the recently enacted Tax Cuts and Jobs Act. This, however, is not a comprehensive assessment of the Tax Cuts and Jobs Act nor does it guarantee that the inferences that have been made here will be realized or achieved. The information presented should not be regarded as tax advice nor should it be utilized to supersede individualized and professional tax advice.
The application of tax strategies differs from person to person and is determined by every individual’s own unique circumstances. EP Wealth Advisors, LLC (“EPWA’) is not in the business of providing tax advice or preparing any related tax documents. Always consult a CPA or tax professional in order to more prudently review and understand your unique tax situation.
EPWA makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented in this report. EPWA has used its best efforts to verify the data included in this report. The information presented was obtained from sources deemed to be reliable. However, EPWA cannot guarantee the accuracy or completeness of the information offered. All expressions included are opinions, that are subject to change without notice.