Recently the President signed into law a highly anticipated and discussed tax reform bill (Tax Cuts and Jobs Act or TCJA).  The bill covers a wide range of tax legislation that will have far reaching implications on a variety of financial topics. We have prepared a brief summary of some key topics we feel are impactful to our clients.  As with all of our communications, the purpose of this summary is to provide a brief overview of topics expected to impact the majority of the client base.  This summary should not be used as a summary of all changes.  We strongly suggest each client spend time with their tax planning specialist to discuss how this legislation specifically impacts them on an individualized basis. For a comprehensive comparison of the current law vs. the new tax law, please click here.

1.  Adjusted tax brackets: The federal tax brackets have been adjusted and many Americans will receive a tax break.

Our take: By and large, a tax break of this magnitude is positive for our client base. This is the 3rd largest tax break ever with a 1.1% cut as a percentage of GDP (according to the Wall Street Journal), ahead of the Bush tax cuts (2001), and only behind Regan (1981) and Kennedy (1964).

How will you be impacted by the change in tax brackets? Here is a simplified Tax Calculator from the Wall Street Journal for you to use.

2.  Capital gains: The media buildup of this legislation created many concerns regarding potential changes to the treatment of capital gains.  In short, the tax legislation surrounding the taxation of capital gains were left generally unchanged.  The topic of removing specific identification for security sales was a highly debated matter leading up to the finalized bill.  Many were expecting a mandatory First-In/First-Out (FIFO) method of accounting for the sale of securities.  Fortunately, this was not part of the final bill.

Our take: We are happy that the final legislation affords our firm the ability to maximize after tax returns for our clients (instead of being forced to sell the tax lot that was purchased first).

3.  Standard deduction & personal exemptions: The standard deduction amount was essentially doubled to $12,000 for individuals and $24,000 for families (the current standard deduction amount is $6,350 for individuals and $12,700 for married filing jointly).  The personal exemption was eliminated and many itemized deductions were eliminated.

Our take: The bill seeks to streamline the tax return.  The increase in the standard deduction is meant to reduce the number of tax returns filed with itemized deductions.  It is important to review your previous tax returns to analyze your itemized deductions.  Many clients maintain certain expenses, such as mortgage interest, for the tax benefit.  The recent changes suggest a review with your tax planner to ensure certain expenses continue to carry benefits for you.

4.  Estate tax: The bill doubles the current federal gift and estate tax basic exclusion amount to $11.2 million per spouse in 2018. Additionally, the stepped-up basis for estate property is retained.

Our take: The current federal gift and estate tax basic exclusion amount is $5.5 million per spouse.  The increase is positive news for ultra-high net worth families with estates in excess of $11 million individually ($22 million combined estate value). While this does not negate the need for ongoing estate planning, it reduces the impact of certain strategies that were often times expensive and tedious.

5.  Corporate tax reduction: The new bill reduces the corporate tax rate for C Corporations to a flat rate of 21% (lowered from a top rate of 35%).

Our take: Lower corporate taxes in the US enables further economic growth, jobs, and repatriation of corporate assets.

6.  Interest rate deductions: The bill disallows the deduction for interest paid on Home Equity Lines of Credit (HELOC) and tweaks the rules on original acquisition indebtedness for your home (First mortgage on a first or second home is limited to $750,000).

Our take: It may be time to revisit the discussion of paying off certain types of mortgage debt or using margin loans strategically to lower the overall interest burden on your debt.

7.  Changes to education funding vehicles, kiddie tax, tax credits, etc.:  The bill expands 529 plans to include tax free distributions of up to $10,000 per year per student to pay primary school expenses (K-12) in addition to college expenses.

Our take: In the past, funds invested in 529 savings accounts accumulated tax free; however, it could only be used for college expenses. Now, up to $10,000 can be distributed annually to cover the cost of sending a child to a “public, private or religious elementary or secondary school.” It is important for parents and grandparents to review the sections pertaining to these areas in the attached document. For clients who have UTMA investment accounts here, we will be paying particularly close attention to the impact of the kiddie tax.

8.  Alimony: Currently the person paying the alimony (also known as spousal support) deducts the amount paid and the recipient claims it as income and pays taxes on it.  The bill makes sweeping changes to the current rules.  In any divorce commenced after December 31, 2018, the spouse paying alimony cannot deduct the payment and the spouse receiving the payment will no longer be required to pay taxes on the payments.

Our take: The long term impact of this has yet to be fully revealed as taxes are taken into consideration when calculating alimony payments. While inequities will likely be accounted for, this may lead to less money in total available for both of the former spouses.

9.  Retirement savings vehicles – 401(k)’s and IRA’s: The final bill maintains the current rules for both 401(k) and IRA plans.

Our Take: We are happy to find no negative changes in this area.

10.  Recharacterizations (reversals) of Roth IRA conversions:  The new bill has eliminated an investor’s ability to recharacterize a conversion to a Roth IRA once completed.

Our take: This topic is only impactful if you regularly execute Roth conversions or have an intention to convert in the future.  In short, a conversion to a Roth IRA is an event in which an investor elects to pay taxes on all or a portion of their traditional IRA in exchange for tax free growth in the Roth IRA.  A recharacterization is a provision which allows an investor to essentially change their mind once they see the tax impact.

Please understand we are providing a general summary of the new tax bill.  The information contained herein does not constitute tax advice and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code.  We recommend that you consult a tax professional to understand how the new bill impacts you.  We are happy to assist and will direct you to a professional should you need a referral.

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Rob Overall, CFP®, CPWA®

Wealth Advisor