Tax Reform 2017

While the sweeping changes to tax policy in the United States will likely take time to fully digest and understand, below, please find a brief summary of some of the key takeaways. We included several tax planning strategies for you to consider implementing before year-end. As always, please consult your tax and legal advisors to determine if these strategies are appropriate for your individual circumstances.

Tax Reform Summary

  • Maintains seven federal income tax brackets for individuals and married couples filing jointly, though reduces rates to 0%, 10%, 12%, 22%, 24%, 32%, 35%, and 37% and adjusts some of the income ranges to which each marginal tax rate applies. The changes expire December 31, 2025.
  • Increases the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly, also expiring December 31, 2025.
  • Eliminates the personal exemption.
  • The estate tax remains but the exemption amount would be raised to $11.20MM for individuals and $22.40MM for couples. Like other individual provisions above, this expires December 31, 2025.
  • Limits state and local tax deductions, including property taxes, to $10,000 per household (applies to both individuals and married couples).
  • Maintains the mortgage interest deduction for existing homeowners and for new purchases taxpayers can deduct interest on up to $750,000 in debt.
  • Tax-free 529 plan distributions expanded to cover elementary and secondary school expenses (up to $10,000 in distributions per student each year). This includes public, private, and religious schools, as well as homeschooling options.
  • Alimony payments will no longer by deductible by the payor nor reportable as income by the recipient, starting in 2019.
  • Revamps the “Kiddie Tax” rules, so that unearned income for children (generally, those under age 19, or full-time students under age 24) is now subject to trust tax rates.
  • Eliminates miscellaneous itemized deductions.
  • Doubles the child tax credit to $2,000 per child (refundable up to $1,400 per child for individuals without tax liability). The credit phases out for individual taxpayers with $200,000 or more in income and married couples with $400,000 or more in income. This expanded credit expires December 31, 2025.
  • Roth conversion “recharacterizations” are no longer allowed, but you can still recharacterize a Roth contribution if you later discover that your income exceeds Roth limits.
  • Lowers the corporate tax rate to 21 percent from the current 35 percent, starting in 2018.
  • Establishes a 20 percent business income deduction for pass-through businesses, with limitations.
  • Removes the Obamacare provision requiring Americans to buy health insurance or pay a penalty, starting in 2019.
  • Eliminates the corporate alternative minimum tax, and increases the exemption from the individual AMT, meaning that fewer taxpayers will face AMT exposure in the future. The current version proposes increasing the exemption to $1MM for families and $500,000 for other filers.
  • Maintains tax deductions for charitable contributions and retirement savings plans.
  • Allows businesses to immediately write off the full cost of new equipment.
  • America businesses holding cash and cash equivalents “offshore” will pay a one-time 15.50% tax on those earnings.

Contributions to Retirement Plans, Health Savings Accounts, and 529 College Savings Plans

401(k) and 403(b) plans generally allow eligible employees to contribute up to $18,000 per year ($24,000 per year for employees age 50+). In 2018, the limit increases to $18,500 ($24,500 for employees age 50+).

Health Savings Accounts allow tax-deductible contributions of $3,400 for an individual, $6,750 for a couple/family with a $1,000 catch-up for Age 55+. In 2018, these amounts increase to $3,450 for an individual and $6,900 for families.

Illinois 529 Plansallow Illinois residents to deduct contributions for state income tax purposes (limits are $10,000 for individuals or $20,000 per year for married taxpayers filing jointly). No changes for 2018.

2017 Tax Prepayment

The standard deduction is nearly doubled, and other itemized deductions are now more limited, meaning that fewer taxpayers will itemize going forward. While you can’t prepay 2018 property or state/local taxes in 2017, some tax professionals suggest you can estimate your 2017 liability and pay the balance prior to January 1st to lock in current year deductions. Even if you overestimate, these amounts won’t become taxable until 2018.

Charitable Contributions

Remember, you can only deduct charitable contributions if you itemize, so you could potentially lose the tax benefits by delaying contributions until 2018. Accelerating planned charitable contributions to 2017 can lock in those deductions before reforms potentially disqualify you from the tax benefits. One way to accelerate contributions is by setting up a Donor Advised Fund, allowing you to make current year deductible contributions and then disburse the funds in future years to the charitable causes of your choosing. Appreciated stock often makes a great charitable gift, allowing the donor to deduct the fair market value of the stock without paying capital gains tax on the appreciation. In the future, it may be worthwhile to “bunch” charitable contributions to occur only once every few years, allowing you to overcome the higher standard deduction threshold and use the deduction. Finally, for our clients who are age 70.5 or older and taking Required Minimum Distributions (“RMD”) from qualified accounts, remember that you can contribute up to $100,00 of IRA assets directly to a charity, effectively satisfying your RMD without recognizing income.

Illinois recently passed the “Invest in Kids Act”. The law, effective January 1st, 2018, allows individuals and corporate donors to make contributions towards non-public school scholarships for qualifying families and receive a credit (not a deduction) on their Illinois state income taxes equal to 75% of the donation. Corporate contributions enter a general pool, but individuals may direct donations to a specific school. For Illinois residents who would like to support a favorite institution, it is important to act fast and make a commitment on or shortly after January 1, 2018. The law limits funding of this program to $100 million in donations ($75MM in Illinois income tax credits).

Have a very happy and safe holiday season.

Team EFG


December 22, 2017

Sources:

http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf

https://www.kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies/

https://www.wsj.com/articles/cut-your-tax-bill-what-to-do-before-jan-1-1513726078

http://www.washingtonexaminer.com/gop-tax-bill-highlights-read-the-summary-of-the-legislation-agreed-to-by-the-house-and-senate/article/2643677

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-contributions

https://www.irs.gov/publications/p969

https://www.irs.gov/newsroom/irs-announces-2018-pension-plan-limitations-401k-contribution-limit-increases-to-18500-for-2018

http://www.revenue.state.il.us/InvestInKids/

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About the Author:

Kevin J. Prendergast, CFA
Chief Investment Officer
Visit My Profile

Bachelor of Science in Finance, University of Illinois at Urbana-Champaign, College of Business

Holds the Chartered Financial Analyst (CFA) designation

Maintains Series 7 and 66 Licenses through ValMark Securities, Inc., a FINRA-registered Broker/Dealer


About the Author:

Sam Paul Maness
Director of Financial Planning Operations


Bachelor of Science in Personal Financial Planning, Central Michigan University

Juris Doctor, University of Alabama School of Law

Maintains Series 7 license through ValMark Securities, Inc., a FINRA-registered Broker/Dealer, and Series 66 license through ValMark Advisers, Inc., a SEC-registered Investment Adviser


The material contained in the commentary is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to the accuracy and does not purport to be a complete analysis of the material discussed. It does not constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned. The opinions expressed do not necessarily reflect those of the author and are subject to change without notice. Past performance is not indicative of future results.


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