As you may well have heard, at the end of 2017 Congress passed the Tax Cuts and Jobs Act. While corporations might be celebrating the cut of the top corporate tax rate from 35 percent to 21 percent, many might be wondering how the new tax law affects them personally.
• Individual Tax Rates are Temporary — If you look at a tax table from 2017 to 2018, you will surely notice that the overall rates have changed. The top marginal tax bracket has dropped from 39.6 percent to 37 percent and the bottom rate remains at 10 percent. However, tax cuts for individuals and families are not permanent and are set to sunset after 2025 while tax cuts for businesses are permanent.
• Changes to Personal Exemptions and Standard Deduction — The Tax Cut and Jobs Act essentially does away with the personal exemption in favor of a higher overall standard deduction. For example, in 2017 the personal exemption was $4,050 per qualifying family member. In 2018, there will no longer be personal exemptions in favor of a higher standard deduction ($12,000 for individual and $24,000 for married couples in 2018). This may affect families who had multiple children and were afforded both personal exemptions and the standard deduction under the old tax law.
• Changes to Itemized Deductions — There are several changes to expenses that may qualify for itemized deductions and it’s important that you work with your tax professional to determine how you may be affected. We will discuss just a few in this article. The biggest change is to the state, local and property tax deductibility. Prior to the Tax Cuts and Jobs Act, state and local taxes could be deducted along with property taxes. Now the cap is a $10,000 (for individuals and married filing joint) limit for all state, local, and property taxes. This may disproportionately affect taxpayers in high income tax states like California.
Additionally, another change made was to the deductibility of mortgage interest. Any new mortgages will be allowed to deduct interest on the first $750,000 of debt principal (it used to be $1,000,000 under the old tax law).
• Changes to Estate Tax Thresholds — Under the Tax Cuts and Jobs Act, estate tax thresholds get an increase. Under the old tax code, individuals could have passed $5.49 million ($10.98 million for married couples with some proper planning) to heirs free from estate tax in 2017. In 2018, the exclusion amount is set at $10 million for individuals and $20 million for married couples with proper planning (it will actually be slightly higher once the “indexed” amount is announced by the IRS). However, the new exemptions amounts are temporary and could revert back to old levels in the future if Congress lets them sunset.
• Some Misc Items — The individual mandate to buy health insurance is set to go away in 2019 but remains in place for 2018. How this will ultimately affect the overall health insurance market remains to be seen. Divorce agreements made after 2018 will no longer allow alimony payments to be tax deductible for the person paying it and taxable income to the person receiving.
The items mentioned in this article are just the tip of the iceberg and only some of the changes to the tax code that took place with the passage of the Tax Cuts and Jobs Act. Everyone’s situation is different and it’s important to seek out qualified professional advice to determine how you may be impacted by some of the changes.
Gary E. Croxall, CFP®
Registered Principal of LPL
Soren E. Croxall, CFP®
Registered Representative of LPL
Securities and Advisory Services offered through LPL Financial, member FINRA/SIPC, a Registered Investment Advisor. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.