Tax Cuts and Jobs Act
December 22, 2017
We wanted to update you on the new tax bill called The Tax Cuts and Jobs Act that was signed by the President on December 22, 2017. There are some tax planning strategies to consider implementing prior to December 31, 2017. Here’s a look at some of the key items to consider prior to year-end:
Individual income tax rates: the maximum rate drops to 37% from 39.6% effective January 1, 2018. The current tax treatment of qualified dividends and capital gains remains the same along with net investment income tax (3.8%) and Medicare tax (.9%). The Alternative Minimum Tax (AMT) has not been repealed but exemptions have increased.
- Tax planning tip – When rates will decrease, the general rule is to defer income to 2018 and increase itemized deductions (see below regarding charity) in 2017.
Standard deduction and personal exemptions: The bill increases the standard deduction to $24,000 for married filers, $18,000 for head-of-household filers and $12,000 for all other filers for 2018. The bill eliminates the personal exemptions that were phased out for many higher income taxpayers anyway.
State and local taxes: The bill limits individual’s state and local income taxes, property taxes and sales tax deductions to a combined amount of $10,000 ($5,000 for married taxpayers filing separately) in 2018.
- Tax planning tip – If you pay state estimated income taxes, consider paying the 2017 fourth quarter state estimated tax payment by December 29, 2017. If you are subject to AMT there may not be a benefit by prepaying. Note, the bill disallows a deduction in 2017 for any prepayment of 2018 state and local taxes. If you live in a county that bills real estate taxes in arrears, consider making 2017 real estate tax payment otherwise billed in 2018 in 2017. For example, California does bill for property taxes in arrears, however, this does not apply to Washington state property taxes.
Miscellaneous itemized deductions: All miscellaneous itemized deductions subject to the 2% floor under current law would be repealed as of December 31, 2017. This includes fees for investment management, estate planning, and tax preparation.
Charitable contributions: Under the bill, the charitable deduction remains the same with a slight increase in the cash contribution limit to 60% of Adjusted Gross Income (AGI), up from the current limit of 50% of AGI.
- Tax planning tip
- The general rule would be to pay all miscellaneous itemized deductions before December 31, 2017. Remember to consider the 2% floor phase out limitation and AMT.
- The charitable deduction may be more beneficial in 2017 because the tax rates are higher in 2017 versus 2018. Also, it may make sense to fund several years of charitable giving because of the possibility of losing the ability to itemize your deductions in future years (due to the higher standard deduction, the limitations on property/sales tax deduction along with the elimination of miscellaneous itemized deductions). One way to facilitate this is to set up a donor advised fund (DAF), which allows you to frontload charitable deductions into 2017 and make the grants to charities in later years.
Other important provisions to note for 2018 planning:
Business provisions: There are many favorable business provisions that are effective in 2018.
Medical expenses: All taxpayers who itemize would be able to deduct qualified medical expenses that exceed 7.5% of AGI for tax years 2017 and 2018. After 2018, the threshold will return to match the current 10%.
Estate exemption: The bill will not repeal the estate tax but will double the estate and gift tax exclusion amount for a married couple up to $22,000,000 from $10,980,000 as of January 1, 2018. This presents a lot of opportunities for income and estate tax planning.
We wanted to highlight for you some of the key planning points for 2017. Let us know if you wish to discuss any of these items in more detail.