Summary of Legislation by FMP Wealth Advisers
Congress passed the Tax Cuts and Jobs Act on December 20, 2017. We have reviewed the details of this new legislation and summarized in this document the items we believe to be of most impact and interest to our clients. In favor of brevity, we have not included every detail of the legislation in this document. The full text of the Tax Cuts and Jobs Act can be found at https://www.congress.gov/bill/115th-congress/house-bill/1/text.
The effect of each provision in the Tax Cuts and Jobs Act should not be assessed in isolation because the tax law must be considered in whole when calculating an individual’s income tax liability. In general, the new law is expected to reduce income tax liabilities for most taxpayers, but the specific impacts will depend on each taxpayer’s individual situation. We consider the Tax Cuts and Jobs Act to be a modification of the tax law rather than a simplification of the tax law. We believe tax planning will remain an important component in our clients’ financial plans.
Most of the new tax laws created by this legislation become effective for the 2018 tax year and expire after the 2025 tax year. Many of the current stated amounts will be adjusted for inflation over these years. Starting in 2026, the tax laws will revert to those in effect for 2017 unless Congress passes additional legislation to extend or make permanent the laws beyond 2025.
Tax Rates and Tax Brackets
The new law retains seven marginal tax brackets but changes the tax rates and income levels for each bracket. Couples with taxable incomes below $400,000 and singles with taxable incomes below $200,000 will have a 1% to 4% decrease in their marginal tax rates. Couples with taxable incomes between $400,000 and $480,050 and singles with taxable incomes between $200,000 and $426,700 will have a 0% to 2% increase in their marginal tax rates. Couples and singles with taxable incomes above these levels will have a 2% to 4.6% decrease in their marginal tax rates.
The preferential tax rates for qualified dividends and long-term capital gains will remain the same, and the net investment income tax of 3.8% will continue to apply for couples with adjusted gross incomes above $250,000 and singles with adjusted gross incomes above $200,000.
Trusts and Estates
The marginal tax brackets for trusts and estates are reduced from five to four with a decrease in the marginal tax rates of 1% to 5% for all but one income range. The preferential tax rates for qualified dividends and long-term capital gains for trusts and estates will remain the same.
Net unearned income (interest, dividends, capital gains) of children under age 19 and full-time students under age 24 will now be taxed at trust tax rates (shown above). Previously, children’s net unearned income only above $2,100 was taxed at their parents’ marginal tax rates.
The new law increases the child tax credit from $1,000 to $2,000 per qualifying child under age 17. The law also implements a $500 tax credit for qualifying dependents who are not children. These credits can be claimed by couples with taxable incomes less than $400,000 and singles with taxable incomes less than $200,000. Previously, the child tax credit could only be claimed by couples with incomes less than $110,000 and singles with incomes less than $75,000.
The new law completely repeals the personal exemption of $4,050 per taxpayer and dependent that was fully available to claim by couples with adjusted gross incomes less than $313,800 and singles with adjusted gross incomes less than $261,500.
The new law increases the standard deduction from $12,700 to $24,000 for couples and from $6,350 to $12,000 for singles. The additional standard deduction of $1,250 per individual who is blind or over age 65 will continue to apply.
The new law completely repeals the phase out of itemized deductions. Previously, the availability of itemized deductions began to phase out for couples with adjusted gross incomes above $313,800 and for singles with adjusted gross incomes above $261,500.
The deduction allowed for medical expenses is expanded only for 2017 and 2018 to expenses exceeding 7.5% of adjusted gross income before reverting to the 10% threshold in 2019.
The deduction of state and local tax payments will be limited to $10,000 per year. This limit includes the combination of real estate taxes and state and local income or sales taxes.
The deduction of interest on new mortgages to acquire, build, or improve a primary residence will be limited to the first $750,000 of mortgage debt. The deduction of interest on preexisting mortgages will continue to be limited to the first $1,000,000 of mortgage debt. The interest on home equity loans, home equity lines of credit, or other loans not used to acquire, build, or improve a residence will not be deductible.
The deduction limit on cash gifts to charity increases from 50% to 60% of adjusted gross income but remains at 30% of adjusted gross income for long-term capital gain property gifts to charity.
The new law completely repeals the deduction of miscellaneous itemized deductions exceeding 2% of adjusted gross income. The miscellaneous deductions included tax preparation fees, investment advisory fees, safety deposit box fees, and unreimbursed employee expenses.
The alternative minimum tax liability exemptions increase from $86,200 to $109,400 for couples and from $55,400 to $70,300 for singles. Also, the taxable income levels where these exemptions begin to phase out increase from $164,100 to $1,000,000 for couples and from $123,100 to $500,000 for singles.
IRA assets can still be converted to Roth IRAs, but the conversions can no longer be recharacterized once completed. Previously, Roth IRA conversions could be reversed by transferring the converted assets back to the IRA before the tax return filing deadline.
The new law allows tax-free distributions from 529 plans for qualified expenses of up to $10,000 per student per year at public or private elementary and secondary schools. Previously, tax-free distributions were only allowed for qualified expenses at colleges and universities.