Tax Cuts and Jobs Act of 2017

The new tax bill that was passed at the end of 2017 is still being digested by most. While there are many planning opportunities provided by this new complex tax revision, we’d like to focus on the most applicable changes. Try not to get googly-eyed! We know this category is daunting, which is why we are here, but we believe that a basic understanding of the new bill is essential to maximize your hard-earned income.

BIG PICTURE:

  • Corporate tax rates reduced from 35% – 21%
  • Individual taxpayers see a host of changes which have a sunset provision ending in 2025. Whether or not this bill actually expires is anyone’s guess at this point.
  • Pass-Through income for Sole Proprietors, LLCs, Partnerships and S-Corps will require significant tax planning to maximize tax liability and keep more $$ in their pockets.
  • The alternative minimum tax (AMT) exemption has been adjusted and, supposedly, will affect far less tax payers

Let’s Get into it

TAX BRACKETS: Although originally presented to reduce the current 7 brackets to 3, the new version keeps 7 brackets while reducing the top rate from 39.6% to 37%. In comparison with the current brackets, just about everyone will see a small reduction in their marginal tax rate.

MARRIAGE PENALTY: While lower tax brackets would see relief from the so-called “marriage penalty”, it still remains for high income couples earning more than $600k. The overall impact would only be 2% for these couples as the final bracket shift is from 35% to 37%.

LONG-TERM CAPITAL GAINS: Though not completely aligned with the new tax brackets, the 0%, 15% and 20% LTCG and qualified dividend rates will remain. In addition, the proposed FIFO-only method of reporting gains was not included in the new bill (phew!).

PERSONAL EXEMPTIONS ELIMINATED: These were merged into a new expanded standard deduction. Under the new rules, the standard deduction will increase from $6,350 to $12,000 for individual taxpayers and from $12,700 to $24,000 for married couples filing jointly.

CHILD TAX CREDIT EXPANDED: Under the new rules, the child tax credit, currently $1,000 per qualifying child is expanded to $2,000. More importantly, the income phase-out rules are dramatically increased from $75,000 for individuals & $100k for married couples, all the way up to $200k for individuals and $400k for married folks. For those of you with children, this is one of the most significant tax savings and more than makes up for the loss of personal exemptions, for some.

ITEMIZED DEDUCTIONS SIGNIFICANTLY IMPACTED: For most of my clients this is the biggest concern when first looking at the new proposed tax plan. The good news is that the revamped plan is much more positive than both the original plans in Congress and Senate. The deductions mentioned below can be found on your Schedule A. So, to understand the true impact, that’s a good place to start in reviewing your 2016 tax return.

 1. $10K CAP ON SALT & PROPERTY TAX DEDUCTIONS

  • The original plan called for a complete elimination of the deductions, so I guess this is a win. This deduction is reduced to $5k for married filing separate taxpayers
  • In case you were thinking of beating the system, the new rules stipulate that you cannot prepay your 2018 state income taxes. However, you can prepay property taxes, though w/ current AMT laws, you might not get much Federal benefit to that prepayment.
  • Also, 4th quarter estimated taxes should be paid by 12/31/2017 instead of 1/15/2018 to take the deduction on your 2017 taxes.

2. Mortgage Deduction Limited to $750k of principal with new rules in regards to HELOCs and Home Equity Loans.

  • This is much better than the original plan of only allowing a deduction up to $500k of your principal residence, but not quite as generous as the current tax law which allows for up to $1 MM limitation. Keep in mind that this limitation only applies to new mortgages taken out after 12/15/2017 as all existing mortgages retain the $1 MM cap.

3. Medical Expenses Temporarily Expanded

  • This is a HUGE win and a wonderful surprise for those that are dealing with high medical costs. The current rules involving a 10% of AGI threshold for medical expenses is reduced to 7.5%, both retroactively for 2017 and for 2018. After 2018, the medical expense deduction reverts back to 10% of the current AGI threshold.

4. Investment Advisory, Tax Preparation and Other Miscellaneous Itemized Deductions Repealed

  • Any expenses tied to a bona fide business including sole proprietors, LLCs, Partnerships or S-Corps will continue to be able to deduct allowable expenses.

529 PLANS USE EXPANDED: Another exciting change to the tax plan includes the expansion of uses for a 529 plan. These tax-free education accounts can now be used for private elementary & secondary school expenses (up to $10k per student each year) and includes public, private & religious schools. In addition, 529 plan distributions will be permitted to cover homeschooling expenses as well.

AMT REDUCED: One of the most confusing and frustrating pieces of the current tax law, AMT (Alternative Minimum Tax) is undergoing a bit of a facelift. These changes will significantly reduce the number of taxpayers affected by this additional tax.

Other notable provisions that were and were NOT included in the final bill:

- Section 121 exclusion of $500k of capital gains on sale of primary residence was NOT in the final legislation! Nor was any caps on income for taking the exclusion. HUGE WIN for homeowners.

- Individual Mandate repealed starting in 2019. This is the penalty imposed on taxpayers for not having health insurance.

- Alimony Treatment Reversed starting in 2019. THIS WILL APPLY ONLY TO DIVORCE AGREEMENTS AFTER 12/31/2018. Alimony payments will no longer be an above-the-line deduction for the payor nor will it be taxable income to the recipient. 

- Moving Expenses Repealed. Starting in 2018, there will no longer be a deduction for moving because of work (except for certain active military) and any reimbursed moving expenses will be taxable income to employees.

- Business Entertainment Deductions on Alert. The new legislation will look to curtail these expenses to just include the 50% deduction for food & beverage. Say goodbye to the tax deductibility of golf outings and concerts.

The bottom line

SO, what does this mean for you? Well, it means that in trying to make the tax code more easily and digestible, our government went and added a few more layers of complexity. For some of you, tax planning will be more important now than ever, especially when deciding how to setup freelance business models and how to run current LLCs/Partnerships/S-Corps to provide the most tax savings possible. Again, this legislation has not yet been signed, so it is not law…but, better to start thinking about how these changes will affect you.

As always, we are here to help with preparation, planning and your entire financial future. Feel free to reach out with any questions and I look forward to seeing you again this upcoming tax season.

See how Four15 can help you make the most of your hard-earned income with these Strategies to Consider.

For years in New York, Eric was my loyal trusty tax guy, working around my hectic corporate schedule and making the annual tax filing process seamless for me. Then after moving to California, I didn’t know what would happen. Eric didn’t skip a beat, and now prepares my family’s taxes, all via email & phone calls. It’s so simple—right from the convenience of my living room!”

—L.J. Laguna Beach, CA