On December 19th, 2017, the House was the first in line to approve the most significant modification to our tax code in over 30 years.
The following day on December 20th, the Senate followed suit by stamping their approval on the $1.5 trillion tax reform bill.
The bill then arrived on President Trumps desk for final approval which was given on December 22nd, signing the new bill into law.
The official title of the new reform bill is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”. Since that doesn’t easily roll off of the tongue, most people prefer to simply call it “The Tax Cuts and Jobs Act” as it was first introduced.
Below is an introduction to the primary changes that went into affect January 2018.
RATES AND BRACKETS
The number of tax brackets will remain at 7 however, the tax rates and income brackets have been updated.
The image below illustrates the changes for Married couples who file jointly.
The following illustrates changes for Single filers or those who file separately.
The standard deduction has doubled under the new plan and likely to have the most widespread impact on taxpayers and reduce the number of those who prefer to itemize deductions.
Married couples who file Jointly – $12,700 under the old plan increases to $24,000.
Single of those who file separately – Increases from $6,350 to $12,000
Head of Household filers- Will jump from $9,350 to $18,000
Alimony – Previously the individual paying alimony could deduct payments made and the person receiving would claim as taxable income. Under the new plan this goes away as the person paying no longer gets the deduction and the recipient no longer claims the payments as income. (Note: This only applies to divorce and separation agreements signed or modified after Jan. 1st, 2019)
Alternative Minimum Tax (AMT) – This tax is imposed on higher income families and but will affect a fewer number of households under the new plan as the qualifying income level for paying this tax has increased as follows:
Single Filers – Old qualification started at $120,700 and is now $500,000
Married filing Jointly – Previous income sparking this tax began at $160,900 and has jumped up to $1,000,000 under the new plan.
529 College Saving Plans – Under the old tax plan, 529 plans could only be used for qualified higher eduction expenses. The new plan expands the tax benefits of 529 savings by allowing them to be used for private K-12 schooling and eligible eduation expenses in public, private, or religous schools.
Corporate Taxes – The old tax plan used a 4 step rate structure with 35% being the top tax rate. The new plan permanently cuts this top tax rate down to 21%
Estate Taxes – The new plan doubles the amount an estate can be valued at without incurring estate taxes from $5.49 million to $11.2 million.
Home Sales – Homeowners can currently exclude $250,000 (single) or $500,000 (married) of capital gains free from tax when selling their primary home. That law has not changed. However, the qualifications for receiving this benefit has. Under the old laws a person had to live in the residence at least 2 of 5 years prior to sale to qualify for exemption. Under the new law this has been extended to 5 of 8 years that a person must live there to claim the exclusion.
Medical Expenses – The old rule allowed taxpayers to deduct out-of-pocket medical expenses that exceeded 10% of AGI or 7.5% if they are over age 65. The new law expanded the 7.5% threshold to taxpayers regardless of age.
Tax Deductions – Under the old plan taxpayers can deduct expenses paid for tax preparation, business related expenses, and investment fees. The new plan has suspended these deductions until 2025.
Personal Exemptions – The new plan has suspended the ability to claim personal exemptions (yourself, spouse, or dependent) through 2025
1 – The period of time allotted to pay back a loan to a qualified plan has been extended for those separated from service.
2 – The ability to recharacterize a Roth conversion has been removed and will no longer available. This strategy was often used by individuals for ongoing tax planning.
Now the question becomes:
How will these changes affect your situation?
We can show you a comparison using 2017 and 2018 tax rules applied to your situation. It’s a free service.
Feel free to contact us to learn more.
Disclaimer: This newsletter is a publication dedicated to the education of individual investors. This newsletter is an information service only. Advisory Services Network, LLC does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state laws are complex and constantly changing. You should always consult your own legal or tax professional for information concerning your individual situation.
Advisory services offered through Enhance Wealth, a member of Advisory Services Network, LLC, 6600 Peachtree Dunwoody Road, Embassy Row 600, Suite 575, Atlanta, GA 30328. 770-352-0449 Insurance products and services offered through Enhanced Capital, LLC. Advisory Services Network, LLC and Enhanced Capital, LLC are not affiliated.
The opinions expressed herein are solely those of the author and do not reflect the opinions of Advisory Services Network, LLC or any of its other advisory representatives.