Tax Cuts and Jobs Act
Written by Kenneth J. Burke, CPA, CBEC®, CFO and General Manager
The recently enacted Tax Cuts and Jobs Act (TCJA) was approved by Congress and signed into law by the President on December 22, 2017. The bill has altered the tax landscape for many individuals and businesses, and will affect approximately 120 million tax returns. The changes are extensive, and this article provides a high-level overview of some of the highlights to keep you informed.
The individual provisions of the new law are set to expire on December 31, 2025. Depending on your tax circumstances, you may or may not want these provisions to expire. However, it provides us with a unique opportunity to engage in creative, multi-year tax planning in order to maximize the benefits under the new bill.
Changes in tax rates
You may have heard in the news that the goal of tax reform was to reduce the number of tax rates from the existing seven rates to three. While that was discussed, the bill signed into law still has seven rates, but they are now generally lower with the highest rate being reduced from 39.6 to 37%. The tax rates applicable to net capital gains and qualified dividends did not change.
Increased standard deduction
The new standard deductions are:
- Head of household: $18,000
- Married filing jointly: $24,000
- All other taxpayers: $12,000
Although you may have historically had itemized deductions exceeding these amounts, other changes to itemized deductions may affect whether you are above the standard deduction in a given year. This provision will increase the number of taxpayers utilizing the newly increased standard deduction. According to estimates by the staff of the Joint Committee on Taxation, approximately 94% of taxpayers will claim the standard deduction under the bill, up from approximately 70% under the prior law.
Elimination of personal and dependent exemptions
In the past, taxpayers received an exemption for themselves, their spouse and each of the eligible dependents they claimed on their tax return. This exemption is eliminated under the new law.
Child and family tax credit
The TCJA increased the child tax credit for children under age 17 to $2,000 and also introduced a new $500 credit for a taxpayer’s dependents who do not meet the definition of qualifying child.
Changes to itemized deductions
- The overall phase-out of itemized deductions has been repealed.
- The itemized deduction for state and local taxes is limited to a total of $10,000 ($5,000 for those using the filing status of married filing separately). For example, if you paid $15,000 in state income taxes and $6,000 in real estate taxes on your home ($21,000 in total), you would not be able to deduct the $11,000 that exceeds the deduction threshold.
- Mortgage interest on loans used to acquire a principal residence and a second home is only deductible on debt up to $750,000 (down from $1 million).
- Interest on home equity indebtedness (such as a home equity line of credit) is no longer deductible unless the debt is really acquisition indebtedness (used for home improvement).
- Cash donations to public charities are now deductible up to 60% of adjusted gross income.
- Medical expenses are deductible by the amount the expenses exceed 7.5% of adjusted gross income for 2018 (limit changes to 10% starting in 2019).
Sec. 529 plans
The TCJA expanded the opportunities available for education tax planning by permitting $10,000 per year to be distributed from Sec. 529 plans to pay for private elementary and secondary tuition.
Tax reform has eliminated the deduction for alimony paid and the recognition of income for alimony received effective for divorce decrees executed after December 31, 2018.
Estate and gift tax exemptions
Estate and gift tax laws have undergone a number of changes over the past decade. Under the TCJA, the estate and gift tax exemption has doubled to $11.2 million per person effective as of January 1, 2018.
Tax Planning Ideas Under the Tax Cuts and Jobs Act (TCJA)
Considering that we have a finite window of lower ordinary income tax rates, tax bracket management becomes the centerpiece of planning. By strategically recognizing additional taxable income over the next seven years, you may be able to reduce your overall tax bill in the long run.
Charitable contributions using your IRA Required Minimum Distribution (RMD)
Individuals 70 ½ years old are required to take minimum distributions from their IRA otherwise known as RMDs. Taxpayers can pay up to $100,000 directly from their IRA to a qualified charity and that distribution is not included in their taxable income. While this is not a new strategy, it may benefit taxpayers with lower overall itemized deductions under the new bill.
0% capital gains
Who doesn’t like 0% tax? If you file a joint return, you will pay $0 capital gains tax on taxable income up to $77,400. This provides a unique opportunity to deal with concentrated stock positions or capital gain harvesting with little to no tax.
ROTH conversions—No “do-over”
For tax years beginning after December 31, 2017, you can no longer recharacterize a conversion from a traditional IRA to a ROTH. Previously, you could unwind a ROTH conversion before the due date (including extensions) of your personal return. Without this “do-over” provision, it is advisable to wait until the end of the year, evaluate market conditions and then make your decision.
Believe it or not, TCJA passed the “Tax Complexity Analysis” according to the 676-page Conference Committee report. While some aspects of the new bill have simplified tax reporting, the real opportunities are found through the planning process. We are here to help. If you have a question, need planning assistance or would like a few new ideas, don’t hesitate to contact us.