As many of you know, the Tax Cuts and Jobs Act has now been approved by Congress and was signed by President Trump this past Friday. Due to the ever-changing details within the bill, the ARGI Tax Team has been hesitant up until this point to provide any summary of its impact. Below is our most up-to-date summary with the understanding things could always be amended between now and next year.
For those who would like to see this in a more visual format, please follow this link for a video ARGI has put together to briefly summarize the changes: CLICK HERE TO WATCH
In addition to that, here are some of the most Frequently Asked Questions regarding the new provisions of the tax bill and how they could affect individual taxpayers:
DOES THIS REFORM APPLY TO THIS YEAR’S TAXES?
- Besides the medical deduction threshold being retroactively lowered for all taxpayers in 2017 (down to 7.5% of AGI from 10% of AGI), all other items being discussed as part of the new bill apply to the 2018 calendar year for which taxes will be prepared in 2019.
HOW DOES THIS AFFECT ME?
- **Everyone’s income situation is different. It is very important to remember that any advice or instruction provided rarely applies evenly to everyone. Please consult your tax advisor if you are on the fence about how a potential recommendation applies to you BEFORE you take action.**
WHAT SHOULD I DO BEFORE YEAR-END TO TAKE ADVANTAGE OF THE 2017 TAX LAWS BEFORE THE NEW ONES GO INTO EFFECT IN 2018?
- Two of the most significant effects on individual taxpayers in this bill are the increase in the standard deduction and the elimination/limitation of many itemized deductions. The combination of these two significant changes will result in many individuals no longer itemizing their deductions on their 2018 tax return. Because of this, there are a few opportunities that could be considered prior to December 31st to potentially lock-in tax benefits that won’t be available in future years due to the law changes:
- Charitable contributions: While charitable contributions will remain an allowable itemized deduction under the new tax reform, many people will no longer itemize their deductions under the new rules and will subsequently miss out on the deduction at their marginal tax brackets after 2017. If you expect to itemize your deductions for the 2017 tax year, you could consider making additional charitable contributions by December 31stwhile you still have the chance to receive a tax deduction for it.
- Real estate and property taxes: The tax reform bill limits state and local income taxes paid, real estate taxes paid, and personal property taxes paid to $10,000 TOTAL in itemized deductions starting in 2018. If you have the ability to have pay any of your 2018 real estate taxes or personal property taxes by 12/31/17, you could consider doing this. PLEASE NOTE: your susceptibility to the Alternative Minimum Tax could affect the tax deduction value of these types of itemized deductions – please consult your tax advisor if you have any questions.
- Unreimbursed employee expenses: The new tax reform removes all miscellaneous itemized deductions subject to the 2% of AGI floor. This includes unreimbursed employee expenses for W-2 earners who have significant out-of-pocket expenses. There could be an opportunity to purchase necessary equipment or renew necessary dues and subscriptions by year-end to secure the deduction while it still exists for 2017. PLEASE NOTE: your susceptibility to the Alternative Minimum Tax could affect the tax deduction value of these types of itemized deductions – please consult your tax advisor if you have any questions.
WHAT ITEMIZED DEDUCTIONS WERE CHANGED?
- State and local tax (SALT) deduction – For 2018, new tax law limits to a total of $10,000 for the combination of income taxes or sales taxes, real estate taxes, and property taxes. When paired with the increase in the standard deduction, this will have the greatest impact on taxpayers no longer itemizing in 2018.
- Medical expense deduction – new tax law lowers the threshold for deductible medical expenses to exceed 7.5% of Adjusted Gross Income instead of 10% of Adjusted Gross Income in both 2017 and 2018.
- Mortgage interest deduction – For 2018, new law limits interest deduction to only first $750,000 of debt put in place after December 31, 2017. Deduction for all debt placed before 12/31/17 remains limited at $1,000,000 of debt.
- Miscellaneous itemized deductions – new tax law removes these as a deduction starting in 2018. This includes unreimbursed employee expenses, tax preparation fees, investment management fees, safe deposit box fees, etc.
WHAT ELSE CHANGED?
- Tax Brackets – Starting in 2018, a new set of 7 tax brackets go into effect. The rates are slightly lower at certain break points and the highest rate is applied at a greater amount of taxable income.
- Standard Deduction – Starting in 2018, the standard deduction is nearly doubled, increasing from $6,500 to $12,000 for single taxpayers and from $13,000 to $24,000 for joint filers.
- Child Tax Credit – The child tax credit has been increased from $1,000 to $2,000 for qualifying children and the income limitation was raised up to $400,000 of AGI for joint filers from $110,000 in 2017.
- Personal Exemptions – In a direct response to the increase in child tax credit and standard deduction, personal exemption amounts were repealed
- 529 Education Accounts – this bill introduces the ability to use 529 monies for K-12 education expenses. This was previously limited to only college expenses
- Alimony tax effects – For alimony arrangements put into place after December 31, 2018, the receipt of payments will no longer be taxable nor will the payment of alimony be allowed as a deduction.
THERE WERE A LOT OF VERSIONS OF THIS BILL. WHAT WAS PROPOSED THAT DIDN’T END UP CHANGING?
- FIFO Stock Sale Rules: proposed rule to require oldest lots of stock to be sold and recognized as capital gains first was removed.
- Holding Period for Homeowners: Proposed changes to require residency for the five-out-of-eight years to secure gain exclusion on primary residence were removed. Current law remains intact. Principal-residence test remains two-out-of-five years.
- Student Loan Interest, Moving Expenses, and Educator Deduction: The proposed elimination was removed. Current law remains intact. All expenses are deductible to the limits defined in current law.
- Alternative Minimum Tax Repeal: The AMT for individuals remained intact but the exemption amounts were increased to limit the number of people affected by it.
- Changes to Deferred Compensation Income: proposed changes to recognition of income when vested rather than received were removed to keep tax benefits of deferred compensation intact.
Despite its length, this is a very basic breakdown. Any detailed questions or situations should be discussed with your tax advisor based on your unique tax situation rather than blanketed application of the new tax laws.
Based solely on the number of people affected, this is one of the most significant levels of tax reform in the last 30 years. We hope this provides some clarity and hope we can continue to provide clarity in the future.