There’s a lot of debate on whether the Tax Cuts and Jobs Act of 2017 will help grow our economy or add trillions in debt to the federal balance sheet. While only time will tell the true impact on the US economy, most of our clients are more concerned about the bottom-line impact on their personal taxes. At first blush, it appears some of our clients may see tax savings while others may wind up with more taxes due. To help give you an idea of how this could impact your taxes, I’ve listed several items that stand out to me as the most likely to impact the taxes of our clients.
Tax-bracket shift – Tax brackets will make a slight shift down. Current tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The bill shifts these to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The good news is that many may see a slight decrease in marginal tax rates (the amount of tax paid on the top bracket of earned income).
Marriage-penalty relief – The marriage penalty has hurt high-earning couples as it taxed them at higher rates than two individuals making the same combined income. For most married couples, you’ll see that penalty has been removed. As a result, you should be in the same tax bracket as two individuals earning the same combined income from your first dollar earned through $600,000 of combined income. For those earning greater than $600,000 per year, you could see income taxed at higher rates on that excess income.
Deductions – While the bill provides a slight increase to the Standard Deduction ($12,000 for single and $24,000 for married versus a combined Standard Deduction and personal exemption of $10,400 single / $20,800 married), those who live in high-tax states could see a reduction in itemized deductions.
The new tax law will cap state, local, and property tax deductions at a combined total of $10,000. For those living in states such as California, DC, Maryland, New Jersey, and New York, the cap could be especially painful given high state income taxes and property values.
The bill also repeals deductions that include tax preparation fees, investment advisory fees, and unreimbursed business expenses.
For those looking to buy a new home, the bill caps the deduction of interest to the first $750,000 of mortgage principal (down from the current $1,000,000). The good news is this was initially looking like a cap of $500,000 which likely would have impacted a much greater portion of the population.
The good news for parents is that the Child Tax Credit has been doubled to $2,000. In addition, the income phase outs for the credit have been increased to $200,000 for individuals and $400,000 for married couples (up from $75,000 and $110,000 respectively).
401k Loans – Currently, when someone leaves their job, they need to pay off any existing 401k loans or pay interest and a penalty on any remaining balance. The bill allows for former employees to roll those loans into an IRA after termination. For those with outstanding 401k loans, repaying those loans at termination is often a reason to stay with their current job. Now job seekers can have a way to leave their current employer without having to pay a large tax/penalty on the 401k loan should they roll that to an IRA and continue meeting the terms of the loan.
529 Plans – Until now, 529 plans could only be used to fund post-secondary schooling. The new tax law allows for distributions of up to $10,000 per student, per year for public, private, or religious schools from elementary through secondary schooling.
This is a big win for parents. Funding 529 plans only for college increases the risk that their child might not use all the savings. Also, parents may want to send their child to a private high school but might not have sufficient cash flow to pay tuition. If their child has a 529 plan, they can now use that account to help offset the high school’s tuition.
2025 Sunset – Keep in mind that these changes are currently temporary for individuals. Unless something is enacted prior to 2025, taxes for individuals under the Tax Cuts and Jobs Act of 2017 will revert back to 2017’s laws. Corporate tax changes were made permanent under the bill.
Still unsure how this will impact you? You’re not alone. If you’re interested in learning more about how these changes could impact your bottom line, you can get a rough idea with this calculator: Calcxml.com/calculators/trump-tax-reform-calculator. The site also offers a link for a 2017 estimate of your taxes to allow you to compare the two years.
I highly recommend reaching out to your CPA as soon as possible to see if you can do anything prior to the end of 2017 to help minimize your taxes for the year. Also, you may want to find some time in early January (before tax season heats up) to strategize with your CPA and financial advisor about tax planning for 2018 and beyond.
More information – This article only addresses a few of the changes that could come with the Tax Cuts and Jobs Act of 2017. Here’s a more thorough piece on the many changes: Kitces.com/blog/final-gop-tax-plan-summary-tcja-2017-individual-tax-brackets-pass-through-strategies.
- Throughout my nearly 20 years as a Financial Advisor, I have seen some of the best and worst markets in our history. That experience allows me to approach my clients with the knowledge of how the markets fit into their greater financial picture. At Partnership Wealth Management we help everyday people who have accumulated wealth make sense of what they have and work with them to maximize their financial opportunities in a relaxed, comfortable, and professional environment. While we help people from all walks of life, many of our clients are same-sex couples searching for a knowledgeable, LGBT-friendly financial advisor to help them with their unique financial planning needs. I am a CERTIFIED FINANCIAL PLANNER™ professional and have the Accredited Domestic Partnership Advisor(sm) designation. As a Registered Investment Advisor, we are not tied to any company’s investment products allowing us to provide unbiased advice by offering a wide array of investments and other products to our clients. Since 2001, I have been writing articles on financial planning for several regional newspapers and have been a guest speaker on LGBT financial issues for various local and national organizations. Additionally, I have conducted financial planning workshops for large corporations and government agencies. Non-Profit Work I believe that it is important to give back to the community and currently serve as the treasurer for FreeState Justice and as a co-founder/president of Paws for a Cause. I’m a current member of several LBGT, environmental, and local community groups. Personal My wife, Heidi and I enjoy camping, hiking, and traveling with our daughter, Elise, and our dogs, Fenway & Roxy. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.