This post is not intended to constitute tax or investment advice. See your tax advisor in partnership with your investment advisor for advice specific to your situation. While preparing your tax return for 2017, we suggest discussing the new legislation with your tax advisor to determine if there are steps you should take in 2018 with regard to the tax law changes.
Almost everyone in the U.S. who files a tax return — individuals and corporations — will likely be affected by the new tax law changes. While it’s not possible to summarize all the features in the bill in a few paragraphs, we thought that it would be useful to highlight some of the changes we find most relevant.
You can read the full conference report here: http://docs.house.gov/billsthisweek/20171218/Joint%20Explanatory%20Statement.pdf
Effective Dates: The new tax provisions apply to taxable years beginning after December 31, 2017. This means the changes are effective January 1, 2018 for most individuals and tax returns for 2017 will not be affected by the new law. Most of the provisions for individuals are temporary and expire or sunset on December 31, 2025. Unless a new bill is passed before then, we revert back to today’s tax structure.
Brackets: Currently there are seven individual tax brackets including 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Although the House Bill called for simplifying the rate structure to four brackets, the Senate Amendment maintained seven brackets. Ultimately the conference agreed to maintain seven brackets at lower rates including 10%, 12%, 22%, 24%, 32%, 35% and 37%. Please read the conference report for the income ranges for each bracket.
Standard Deduction: For individuals the standard deduction is increased from $6,350 to $12,000. For married individuals filing a joint tax return, the standard deduction is increased from $12,700 to $24,000.
Personal Exemptions: Deductions for personal exemptions can no longer be claimed. The increase in the standard deduction helps to offset this loss and in some cases more than offsets the loss.
State and Local Tax Deduction: Currently individuals can claim state and local income taxes including property tax as an itemized deduction. Although the House Bill called for eliminating this deduction altogether, the reconciled legislation allows a deduction of up to $10,000 for state and local taxes.
Miscellaneous Itemized Deductions: All miscellaneous itemized deductions subject to the 2% floor have been suspended. This includes investment management fees, as well as other expenses such as tax preparation fees, safe deposit fees and union dues.
Charitable Gifts: Cash contributions to charities can be deducted up to 60% of the taxpayers AGI. This is increased from the current 50% limit.
Home Equity Debt: Home equity debt is no longer deductible unless the debt was to purchase, construct or substantially improve the home.
Education Savings Accounts: After December 31, 2017 up to $10,000 per student per year can be withdrawn tax-free from 529 plans to pay for tuition at a public, private or religious elementary or secondary school. Distributions above $10,000 would be subject to tax.