Tax Reform for the Holidays: Better to Give than Receive

12.26.2017 - Craig Richards, CPA/PFS, CFP

Tax Law Changes Are Here.

The tax bill was signed into law by the president on December 22, 2017. The new law could give businesses many reasons to celebrate the arrival of a new year, while the pros and cons for individual taxpayers depend on a number of variables.

Most of the tax changes will take effect on January 1, 2018. The majority of the provisions for individuals in the new bill are set to expire at the end of 2025.

What Can Individual Taxpayers Expect?
While tax rates may be lower for many taxpayers, those who have enjoyed benefits from itemized deductions and exemptions may not be in that camp. Their tax bills may increase in 2018 and beyond. Residents of certain states with high state tax or inflated real estate taxes may also end up paying more. Also, both the 3.8% net investment income tax and additional Medicare tax of .9% will still exist.

Key provisions include:

  • Income tax: Maintains seven individual brackets, with the top rate at 37% versus today’s 39.6% rate. The new 37% top rate will apply to taxable income over $500,000 for single filers and $600,000 for joint filers.
  • Long-term capital gains/qualified dividends: Will essentially remain the same, with a top 20% rate.
  • Standard deduction: Will jump to $12,000 for single filers and $24,000 for joint filers, nearly twice current levels.
  • Mortgage interest: Deduction will be allowed for interest paid on new mortgages up to $750,000, down from $1 million currently. Also applies to second homes, but not to home equity lines of credit, which will no longer be deductible.
  • State and local income taxes, real estate taxes and sales tax: Itemized deductions will be limited to $10,000 on any of the above that taxpayers choose.
  • Child tax credit: Doubles from $1,000 to $2,000.
  • AMT: Retained for individuals, but the exemption and phase-out amounts increase.
  • Estate/GST/gift tax: The exemption amount doubles to $11 million for single filers and twice that for joint filers.
  • Deductions: The new law repeals deductions for alimony, personal exemptions, miscellaneous itemized deductions such as unreimbursed employee expenses, tax preparation fees, safe deposit boxes and investment fees. However, the ability to deduct medical expenses will increase for taxpayers under 65, as the limitation for all taxpayers will now be 7.5% of AGI. The limits for cash charitable contributions will also increase from 50% of AGI to 60%.
  • Pass-through taxes for small businesses: S corporations, partnerships and sole proprietorships, including those owned by trusts, will be allowed to deduct 20% of their qualified income.
  • Qualified tuition programs (529 plans): Tax-free withdrawals will be allowed for K-12 school tuition in addition to higher education.
Actions to Consider before Year End

The bottom line for many taxpayers in the final days of 2017 is that it might be better to give than to receive. The new law almost doubles the standard deduction for individuals and married couples beginning in 2018. So, unless your donations and other itemized deductions in 2018 exceed the new standard deduction, it will not make sense to itemize next year.

Consider making larger-than-usual charitable contributions before the end of 2017 if you believe you will be taking the standard deduction in 2018, or if you think you will be in a higher tax bracket this year versus next year. In this case, your deduction will be worth more in 2017 than in 2018.

It could also be advantageous to pay state and local real estate taxes or fourth quarter 2017 state income taxes before the end of the year, even if they aren’t due until 2018. The new tax law caps all state and local tax deductions at $10,000 in 2018. Therefore, if your real estate tax bill is more than $10,000 each year, or if you are likely to take the standard deduction in 2018 instead of itemizing, consider paying your real estate tax bill before year end. (Please note that this might not result in tax savings if you are subject to the AMT). You will not be able to deduct in 2017 any 2018 income taxes that you attempt to prepay.

Estate Taxes: Still Better to Give

In the area of estate planning, more generous transfer tax exemptions may beg the question: Is lifetime gifting still beneficial? In our view, the short answer is yes.

With the estate tax exemption beginning in 2018 at $11 million for single filers and $22 million for joint filers, lifetime gifting may appear to offer fewer estate tax benefits under the new tax code. However, the increased exemptions are scheduled to expire after December 31, 2025. You may wish to begin thinking about using the additional exemptions that will be available next year in case they do expire after 2025.

We Are Here to Help

If you have questions about tax reform and its potential impact on your financial situation, we can help you determine the most appropriate approach for your circumstances. Please feel free to contact us.

Tax Changes at a Glance

This communication is intended solely to provide general information. The information and opinions stated are as of December 26, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.


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