Planning matters

New Tax Law 2018

On December 22, 2017, the President signed into law new tax legislation with many provisions effective for 2018 and expiring 2025. Here are some of the highlights that apply to most clients and a few obscure details.

Tax Brackets/Rates

  • Individual tax rates reduced
    • from 10%, 15%, 25%, 28%, 33%, 35%, 39.6%
    • to 10%, 12%, 22%, 24%, 32%, 35%, 37%.
  • Trust tax rates reduced
    • from 10%, 25%, 28%, 33%, 39.6%
    • to 10%, 24%, 35%, 37%
  • Amount taxed at each bracket expanded slightly.
  • Capital Gains and Qualified Dividends no longer follow the tax brackets and have their own brackets ranging from 0% to a maximum of 20%. This provides a window of opportunity to sell investments or investment real estate with lower tax.

Standard Deduction & Personal Exemptions

  • Personal exemptions are suspended for tax years 2018 through 2025.
  • Standard deductions increase which offsets a loss of personal exemptions if you file with yourself and 1-2 dependents:
 2017  2018
Single or Married Filing Separate  $6,350 $12,000
Personal Exemption  $4,050 N/A
$10,400

 

 2017  2018
Married Filing Jointly  $12,700 $24,000
Personal Exemptions  $8,100 N/A
$20,800

 

 2017  2018
Head of Household  $9,350 $18,000
 Personal Exemptions  $8,100 N/A
$17,450

Itemized Deductions

  • The AGI phase-out limits for Itemized Deductions are suspended from 2018 to 2025. This will benefit those with incomes higher than $261,500 Single and $313,800 Married.
  • The threshold for deducting medical expenses is 7.5% of AGI for all taxpayers in 2018 and 10% for 2019-2025.
  • HELOC or Home Equity Line of Credit interest is no longer deductible.
  • The deduction for state and local taxes (generally income or sales plus property taxes) is limited to $10,000.
  • Charitable contributions are still deductible.
  • Miscellaneous deductions, such as unreimbursed employee expenses, tax return preparation fees, and investment expenses, are no longer deductible.

Here’s an example of how Itemized Deductions would change for a couple, age 60, living in Oregon with Adjusted Gross Income of $100,000:

2017 2018
$15K Medical $5,000 $7,500 (10% limitation in 2017 vs 7.5% in 2018)
Oregon Income Tax $7,000 included
Property Taxes $5,000 $10,000 (limited to total of $10K for income/property)
Charitable $5,000 $5,000
$22,000 $22,500

The standard deduction for a married couple is $12,700, so they would itemize on their 2017 tax return. However, in 2018, the Standard Deduction in 2018 is $24,000, so they would not itemize.

Health Insurance

  • The penalty under the Affordable Care Act for not having a minimum level of health insurance coverage goes away effective for 2019.

Child Tax Credit

  • The Child Tax Credit increases from $1,000 to $2,000 for children under the age of 17. The AGI phaseout limit also increased to $400,000 for MFJ.
  • A new non-refundable Family Credit of $500 is allowed for each person who is not a qualifying child, but is a qualifying dependent under the old dependency rules. Thus, a $500 credit may be claimed for a child over age 16, assuming the old dependency rules are met.

Kiddie Tax

  • Through 2025, the parent’s tax rate is not used to calculate kiddie tax. Instead, taxable income attributable to net unearned income is taxed according to the tax brackets applicable to trusts and estates.

Gifting to Charity

  • The ability to direct all or part of your IRA Required Minimum Distribution to charity remains unchanged.
  • Note: If you are taking the Standard Deduction yet give regularly to charity, consider gifting from your IRA if you are over age 70.5 or using a Donor Advised account with appreciated assets if you aren’t RMD eligible.

Gifting to Others

  • In 2018, the gift tax annual exclusion increases to $15,000, up from $14,000.

Alimony

  • Effective 2019, alimony is no longer deductible by the payer spouse and includible in income by the recipient spouse. This rule only applies for divorce or separation instruments executed after December 31, 2018, and instruments executed on or before December 31, 2018 but modified after that date to include these new provisions.

Corporate Rates/Rules

There are many changes for corporate entities. These are best discussed with your preparer for individual advice.

Opportunities & Pitfalls

From our initial review, there is not a one-size-fits-all answer on how the new rules will benefit clients, or not.  Where some deductions or credits are given, others go away. We will be addressing individual circumstances throughout the year to take advantage of any strategies available for your particular situation. If you are contemplating significant changes such as marriage, divorce, selling a rental property or significant charitable contributions, discuss with your planner to make sure you’re aware of the current tax impact.

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