After much anticipation and angst, the end of the year delivered clarity on the tax law changes that will go into effect in 2018. Some of the provisions in the new bill won’t impact many readers of this article in a meaningful way. However, with so many questions, with the hope of keeping people informed and to simplify the categories impacted, we have created a chart to summarize the changes.
The key aspects that we expect will impact most of our clients are the following:
Individual tax rates: The bracket changes will likely lower the income tax rates for higher earners, resulting in less income taxes paid.
Standard deduction: The standard deduction levels have doubled, likely eliminating the benefit for most people who itemize their deductible expenses.
Child tax credit: These amounts have doubled for married people earning less than $400,000 per year.
Estate tax levels: The exemption levels have doubled, making taxable estates under $22.4 million tax free at death for married couples and $11.2 million for single people. This is a substantial savings for many wealthy Americans and will change the estate planning landscape for the time being as people won’t feel such urgency to plan for tax savings at death.
Education: The 529 Education Savings Accounts are now eligible for K-12 schooling expenses rather than only for post-high school expenses. Given that the annual gift exclusion amounts have not changed materially, it seems that many gifting strategies have accounted for upfront gifting into these accounts for college expenses. We expect there will be more planning opportunities around this change.
The accompanying chart provides an overview of each category change. The complete conference report is over 500 pages, and we expect there will be a lot of continued coverage of the ways in which these changes will integrate into our financial system.
|Provision||Current Law||Conference Report|
|Individual Tax Rates||Seven brackets: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, 39.6 percent||Seven brackets: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, 37 percent|
|Standard Deduction||“Single: $6,350; Married/Joint: $12,700”||“Single: $12,000; Married/Joint: $24,000”|
|State and Local Tax Deduction||Income or sales and property SALTs are fully deductible for itemizers||Caps SALT deduction at $10K|
|Child Tax Credit||$1,000 credit for each child; credits phase out at $110K (married)||$2,000 credit, $500 credit for non-minor child dependents; credits phased out at $400K (married)|
|Mortgage Interest Deduction||Interest paid on up to $1 million of mortgage debt is deductable||Threshold lowered to $750K for new mortgages|
|“Pass-Through” Tax Treatment||“Pass-through” income taxed at personal income-tax rates||Deduction allowed for 20 percent of qualifying “pass-through” income; denied to service industry over $315K (married)|
|Corporate Tax Rate||Federal corporate tax rate of 35 percent||Permanent and immediate tax rate reduction to 21 percent|
|Expensing||Businesses must take depreciation, amortizing equipment costs over serveral years||Allows businesses to deduct the cost of depreciable assets in one year. To qualify, the equipment must be purchased after Sept. 27, 2017 and before Jan. 1, 2023.|
|International Tax Rules||Taxes worldwide corporate profits which can be deferred minus taxes paid elsewhere||Moves toward a territorial system, adds new anti-base erosion taxes|
|Repatriation Tax||N/A||15.5 percent on liquid assets, 8 percent on physical assets|
|Affordable Care Act Taxes||Individual mandate tax penalty||Repeals individual mandate|
|Estate Tax||40 percent tax on assets over $5.6 million per person||Immediately doubles the basic exclusion; does not repeal the tax|
|Education||529 savings plans offered tax-free earnings growth and tax-free withdrawals when the funds are used to pay for college||Expanded 529 savings plans to include K-12 expenses|
|Alternative Minimum Tax (AMT)||“Corporate AMT: 20 percent; Individual Income Exemption: Single: $54,300; Married/Joint: $84,500”||Repeals corporate AMT; maintains individual AMT and increases exemption thresholds: Single: $70,300; Married/Joint $109,400|
A better process
In terms of my personal view of this type of tax legislation, I feel a lot of uncertainty when these types of laws pass without the benefit of collaboration. I felt this way when the health care changes were dominated by the Democrats, and I feel this way now with the Republicans making this happen. The benefit of differing points of view and compromise are lost when only one side moves its agenda forward. I look forward to a future that more resembles the past, when politicians actually worked together rather than in spite of each other.
An important point to remember when it comes to tax legislation is that nothing is forever. Over the course of history, there have been numerous changes even looking back over my 20-year career, the estate tax exclusion limits have been adjusted at least five times. So, to say that it will change again is almost inevitable.
What to do?
Knowing that things have changed in the tax world is a good indication that it’s time to revisit any existing documents and plans that have been drafted to support your ultimate trust and estate planning. It isn’t enough, in my mind, to conclude that nothing needs to be done to plan now that the limits are so much higher and your estate won’t be affected by taxes upon your death. Careful estate planning includes a multitude of issues beyond dealing with death taxes. Taking this time to check back in on your plans is a good idea if it has been some time since these were last visited.
Beyond seeing your estate planner, it’s a good time to check in with your accountant. It’s the time of year right before accountants get very, very busy, so catch them now while they are only normally busy. Reassurance that you are on track and that no benefits go missed is a good idea in the wake of any changes like this.
Dorie Fain is the founder and CEO of &Wealth, a boutique financial advisory firm dedicated to helping women who are recreating their lives, with offices in New York City and Baltimore.