The “Tax Cuts and Jobs Act” made it through the Senate and House, and is on a clear path to the President’s desk—but it’s still a bit unclear what this means for the individual taxpayer. Use this guide to better understand the final plan and learn tax-savvy steps you can take before year end.
The new bill, which brings a scale of changes to the tax code that hasn’t been seen in over 30 years, is a decisive victory for corporations. The final version, awaiting the President’s signature, will lower the corporate rate from 35% to 21%, offer deductions for certain capital expenditures in the year they occur (subject to a sunset provision ending December 31, 2023), and abolish the Alternative Minimum Tax (AMT). All this, in turn, will provide a more competitive positioning for American corporations in the global marketplace.
The far-reaching effects of the bill will impact nearly every aspect of the economy—long-term estimates are projecting an increase in full-time jobs by 339,000 and gross domestic product (GDP) by 1.7% (Source: taxfoundation.org). GDP growth will maintain a pace that should allow rates to normalize, reducing the risk of a recession given the financial stimulus.
In terms of benefits to individuals, there are tax rate cuts across all income levels (see page 2) along with a more simplified tax code. Taxpayers in the 24% bracket are the biggest winners in terms of a rate decrease, but top bracket payers will see a greater dollar savings as a matter of scale.
Other winners include retirees who may be able to take advantage of lower rates by executing larger Roth conversions between 2018 and when the rate reductions sunset after December 31, 2025. Taxpayers with the highest earnings will likely feel the biggest impact of the $10,000 state and local tax cap, specifically those paying higher state income tax rates and those paying the greatest amount of property taxes.
On a positive note, the estate tax exemption has doubled, and those normally subject to the individual AMT should also be glad to see the exemption amounts increased to $70,300 for single taxpayers and $109,400 for joint filers (previously $54,300 and $84,500, respectively).
UNDERSTANDING SUNSET PROVISIONS
- A “sunset provision” is a stipulation that a program will be terminated at the end of a fixed period, unless it’s formally renewed.
- History has shown that tax cuts have been made permanent prior to their sunset in the past.
- The tax cuts below are subject to sunset provisions,
ending on the following dates:
✓ Capital expenditures for corporations (12/31/23)
✓ Doubled estate tax exemption for individuals (12/31/25)
✓ Increased AMT exemption for individuals (12/31/25)
From a less favorable perspective, personal exemptions have been eliminated. Currently at $4,050 for each qualified family member, this will hit large families harder than most. To mitigate some of that effect, the child tax credit has been increased from $1,000 to $2,000 for qualifying children. Additionally, a crucial expansion to income-driven phaseouts related to the child tax credit have been expanded to $200,000 for singles and $400,000 for joint filers (previously $75,000 and $110,000, respectively).
MARRIED FILING JOINTLY
| CURRENT BRACKET | CURRENT RATE | NEW BRACKET | NEW RATE |
|---|---|---|---|
| $1-18,650 | 10% | $1-$19,050 | 10% |
| $18,651-$75,900 | 15% | $19,051-$77,400 | 12% |
| $75,901-$153,100 | 25% | $77,401-$165,000 | 22% |
| $153,101-$233,350 | 28% | $165,001-$315,000 | 24% |
| $233,351-$416,700 | 33% | $315,001-$400,000 | 32% |
| $416,701-$470,400 | 35% | $400,001-$600,000 | 35% |
| $470,401- | 39.6% | $600,001- | 37% |
UNMARRIED
| CURRENT BRACKET | CURRENT RATE | NEW BRACKET | NEW RATE |
|---|---|---|---|
| $1-9,325 | 10% | $1-$9,525 | 10% |
| $9,326-$37,950 | 15% | $9,526-$38,700 | 12% |
| $37,951-$91,900 | 25% | $38,701-$82,500 | 22% |
| $91,901-$191,650 | 28% | $82,501-$157,500 | 24% |
| $191,651-$416,700 | 33% | $157,501-$200,000 | 32% |
| $416,701-$418,400 | 35% | $200,001-$500,000 | 35% |
| $418,401- | 39.6% | $500,001- | 37% |
OTHER NOTABLE TOPICS ON THE TABLE
Another potential tax break is available for individuals who receive income from a pass-through entity. Common examples would be Sole Proprietorships on Schedule C of your 1040, LLCs, Partnerships and S-corporations. Generally, the idea is that pass-through businesses would pay tax on 80% of their qualified business income (effectively at 80% of the recipient’s rate). Qualified business income is the only portion of pass-through income eligible for the deduction. There are exceptions to keep in mind:
- Specified service businesses are not eligible for this deduction
- Investment income from a pass-through entity is not eligible for the deduction
- The deduction is limited to the lesser of 20% of qualified business income or 50% of total wages paid to employees
Restrictions are also in place to prevent gamesmanship from owners regarding the classification of wages as business income. Strategies will continue to develop once technical corrections have been made to the final legislation. Consult your tax adviser for answers to questions about your specific pass-through entity and the extent of its eligibility.
| CURRENT LAW | NEW PLAN | |
|---|---|---|
| Number of Tax Brackets | 7 | 7 |
| Standard Deductions | $6,350 (Single); $12,600 (Married) |
12,000 (Single); $24,000 (Married) |
| Estate Tax Exemption | $5.49mm (Single); $10.98mm (Married) |
$11.2mm (Single); $22.4mm (Married) |
| Personal Exemptions | $4,050 (Each) | Eliminated |
| Child Tax Credit | $1,000 | $2,000 |
| ACA Individual Mandate Penalties | $695 | Repealed (Begins 2019) |
| Corporate Tax Rate | 35% | 21% |
It’s difficult to predict exactly when the final tax bill will be signed by the President, but here are some actions you can take now to maximize key tax benefits that will not be available once it’s officially signed into law.
IF YOU’RE PLANNING TO ITEMIZE IN 2017 …
Households who plan to itemize in 2017 should focus on deductions that will be cut or eliminated in 2018, such as the federal tax deduction limitation of $10,000 on state and local taxes—which includes income tax and property taxes. As a result, you might want to consider prepaying your installment payment of real estate taxes due in 2018 (if your county allows you to do so).IF YOU’RE THINKING OF PURCHASING A NEW HOME …
When signed into law, the final plan will also reduce the mortgage interest deduction threshold from $1,000,000 to $750,000 for new home purchases. That said, if you’re thinking of buying a new home in the coming months, you may want to limit your mortgage balance to $750,000 or less if you have the means to do so.IF YOU’RE MAKING CHARITABLE CONTRIBUTIONS …
The limit for charitable deductions has been expanded under the new bill. Consider timing donations to your donor advised fund in certain years to maximize your benefit relative to the increased standard deductions. For instance, charitable contributions given to a donor advised fund are locked in for that tax year, however they can be deployed in subsequent years. This could provide a means for taxpayers to strategically time their charitable contributions (i.e., one every three years). Remember, itemized deductions are only beneficial to the point they exceed your standard deduction.✓ REALIZE YOUR TAX LOSSES
Although almost all asset classes are up for 2017, you could have a few positions at a substantial loss. By selling these positions and realizing the loss now, you can offset some of your realized gains for the year. This is a great way to reduce your tax bill heading into 2018.
Don’t forget, though, there may be a transaction cost associated with this strategy. Also keep in mind the Wash Sales restriction, which prohibits investors from selling a security at a loss and buying a substantially identical stock or security within 30 days before or after the sale.
✓ INCREASE YOUR RETIREMENT ACCOUNT CONTRIBUTIONS
You have until April 15, 2018 to contribute to a Traditional or Roth IRA, however, you only have until December 31, 2017 to make a 401(k) contribution. The current IRA contribution limit is $5,500 per person, with a $1,000 catch up if you’re 50 years old or older in 2017. If you’re financially able, increase your contribution percentage on your final paycheck to max out your employer-sponsored plan for the year.
This year’s contribution limits for a pre-tax or Roth 401(k) are $18,000 per person, with a $6,000 catch up for if you’re 50 or older in 2017. You’re also able to make after-tax contributions up to the defined contribution annual limit of $54,000 ($60,000 with catch up). This means, after you reduce your defined contribution limit by your pre-tax or Roth contributions and employer contributions, you can defer the difference by making after-tax contributions into the 401(k). The earnings on your after-tax contributions will grow tax-deferred; however, once you separate from service, you can roll all your aftertax contributions directly into a Roth IRA. This is a great strategy to accelerate the amount of funds in your Roth IRA at retirement, which will then grow tax-free for you and your beneficiaries. Note: Not all 401(k) plans allow after-tax contributions.
✓ MAX OUT YOUR HEALTH SAVINGS ACCOUNT
If you’re eligible for a Health Savings Account (HSA), you have until April 15, 2018 to contribute up to $3,350 for individual coverage and $6,750 for family coverage. If you’re 55 or older in 2017, you can contribute an additional $1,000. Both spouses covered under a family plan will need to open up an HSA so each can take advantage of the $1,000 catch up. These contributions will provide an immediate tax deduction and grow tax-free for qualified medical expenses. Once you turn 65, you can use the funds for expenses other than health care—however, you’ll be required to pay income tax on the distribution.
WANT TO LEARN MORE?
Contact The Mather Group to discuss how our in-house Tax team can help us develop a comprehensive financial plan that incorporates tax-conscious strategies.The opinions and advise expressed in this communication are based on The Mather Group’s research and professional experience and are expressed as of the publishing date of this communication. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future results, nor is it intended to speak to any future time periods. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. The Mather Group specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice.
