As of the time of writing, Congress is preparing to vote on a reconciled tax bill which the media reports will be passed and be signed by the President before the Christmas holiday. The final version of the bill was released to the public this past Friday and we want to discuss how it may impact you as an individual payer and what action you may want to take prior to the end of this year.
Key Components of the Tax Bill:
*Tax brackets will decrease for individuals and corporations starting in 2018. The illustration below shows how the tax brackets are shifting for individuals (see chart).
*The standard deduction is nearly doubling to $12,000 for individuals and $24,000 for joint filers. This increase combined with changes to common deductions outlined below should significantly reduce the number of filers who itemize deductions.
-State, local, and personal property tax deductions are preserved as itemize deductions, but the total of these deductions is capped at $10,000 annually.
-Mortgage interest deduction is capped to interest on debt of $750,000 (down from $1,000,000), however the lower cap only applies to new mortgages taken out after 12/15/17.
-Interest on home equity loans not used to buy or improve the home is no longer deductible.
-Temporary expansion of the deduction for medical expenses – lowered threshold to 7.5% of AGI to 10% AGI for 2018 and 2019.
-Elimination of most miscellaneous itemized deductions, including advisory and tax preparation fees.
*The child tax credit will double from $1,000 to $2,000 and a temporary credit of $500 for non-child dependents such as a parent or child age 17 or older will be created. This should make up for the elimination of personal exemptions that often-benefited families of 3 or more. The bill also generously increases the income threshold for filers to take advantage of these credits.
*The Alternative Minimum Tax (AMT) will be substantially reduced for individuals through higher income exemption thresholds. However, like all provisions in the tax bill, this doesn’t take affect until 2018, so if you are in AMT status for the 2017 tax year some of the year-end planning opportunities of accelerating deductions may be nullified. The AMT on corporations will be eliminated.
*Pass-through business income from entities like Partnerships, S-Corps, or LLCs will receive a 20% deduction. This effectively means that only 80% of this qualifying pass-through income will be subject to tax. There are also restrictions on this type of income, and an income cap on the eligibility for this deduction.
*The tax treatment of alimony is being reversed for couples divorcing after 2018. Currently alimony payments are deductible to the individual making the payments, and considered income to the receiving party. For divorces after 2018, the payments made will no longer be deductible and the payments received will not be counted as taxable income.
*The individual mandate and penalty to purchase health insurance is repealed. You will no longer be penalized if you do not purchase health insurance.
*The Estate Tax and Gift Exemptions will double to $11.2 million for an individual and $22.4 million for couples. This means a very small percentage of people will be subject to the estate tax.
*Other aspects of the legislation will create planning opportunities in future years including an increase in some limits on charitable giving and the expansion of the use of 529 plans to pay for private schooling and home schooling for K-12 expenses.
*Many other controversial changes were not implemented including student loan interest deductions and graduate tuition waivers. And finally, to add some perspective, teachers retain the ability to deduct $250 of out of pocket expenses for school supplies.
Planning Strategies to Consider:
*Consider accelerating deductions that will go away or be limited in 2018:
-State and local income taxes
-Real estate taxes
-Personal property taxes
*Medical expenses – group your medical expenses in 2017 or 2018 to take advantage of the lower 7.5% threshold for deduction.
*With these deductions, if you are subject to the Alternative Minimum Tax (AMT), the benefit of these deductions will be eliminated.
*Accelerate additional charitable giving into 2017 to get the maximum tax benefit. If you expect to use the expanded standard deduction in future years, taking more charitable deductions in 2017 will ensure these donations are deductible.
If possible, deferring income into next year when tax rates are lower could be advantageous. Business owners who have greater control of their income should work with their CPA to plan for year-end. If you would like more resources to learn more about the tax changes, here is an easy to follow side-by-side of the key provisions:
Please let us know if you have any questions about these items. In addition to the immediate planning ideas for 2017, tax planning opportunities will emerge in future years and we will be here to assist you with them moving forward.