As 2018 is now in full swing, our team at New England Investment and Retirement Group, Inc. recognizes that the Tax Cut and Jobs Act has led to a number of questions about the provisions that have taken effect. It’s important to remember that just as every individual and business is unique, the provisions of the tax bill are unique with respect to impact. In this letter, we will detail key aspects of this bill that may be applicable to some individuals and businesses.
Most of these provisions are effective in 2018, and while a number of these cuts and adjustments are scheduled to sunset after 2025, the new corporate flat tax rate of 21% is permanent.
Individual Income Tax Rates
Prior to the passage of the Tax Cut and Jobs Act, there were seven income tax brackets as follows: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. Below is a table illustrating the seven new tax brackets and income thresholds for 2018. These new brackets are scheduled to sunset after 2025.
Separate brackets will apply for certain children with unearned income.
Capital Gain and Qualified Dividend
Capital gain and qualified dividend rates did not change under the act; the income levels at which the 15% and 20% rates apply were altered. For 2018, the 15% rate will start at $77,200 for married taxpayers filing jointly, $51,700 for heads of household, and $38,600 for other individuals. The 20% rate will start at $479,000 for married taxpayers filing jointly, $452,400 for heads of household, and $425,800 for other individuals. The 3.8% Net Investment Income tax remains in place for the higher income taxpayers.
Child Tax Credit
The child tax credit has increased to $2,000 for each qualifying child, with a maximum refundable credit of $1,400; the tax bill also included a $500 credit for qualifying non-child dependents. The income phaseout threshold for the credits has been increased to $200,000 for individuals and $400,000 for married couples filing jointly.
Several other credits that were initially at risk of elimination have been upheld in this tax bill, including: credits for the elderly and permanently disabled, plug-in electric drive motor vehicles, and interest credit on certain specific home mortgages.
Standard deduction and personal exemption: The standard deduction has increased to $12,000 for individual taxpayers, $18,000 for heads of household and $24,000 for married couples filing jointly. The personal exemption can no longer be claimed through 2025.
Itemized Deductions: This bill repealed limitations on itemized deductions through 2025.
Passthrough Income Deductions: The tax law includes a new deduction for business owners, allowing them to deduct 20% of “qualified business income” from a partnership, sole proprietorship or S-corporation.
Mortgage Interest Deduction: The home mortgage interest deduction was modified to decrease the limit on acquisition indebtedness to $750,000, down from $1 million. The home equity interest deduction appears to have been eliminated through 2025, unless it can be considered acquisition indebtedness.
State and local taxes (SALT) deduction: The state and local tax deduction has been capped at $10,000, and pre-payment in 2017 for 2018 state income taxes will not result in a deduction.
Miscellaneous itemized deductions: all miscellaneous itemized deductions subject to the 2% floor have been eliminated through 2025, including tax preparation and investment management fees.
Casualty Loss: Deductions for a casualty loss are now only eligible if they are due to a president declared disaster.
Charitable contributions: these have been limited by increasing the income-based percentage limit for charitable contributions to public charities to 60%.
Medical expense deductions: have been limited to 7.5% of adjusted gross income for years 2017 and 2018.
Alimony: alimony and separate maintenance payments cannot be deducted by the payer in divorce or separation agreements, finalized after December 31st, 2018, nor are they included in the income of the recipient.
IRA Recharacterization: The tax bill has eliminated the Roth IRA recharacterizations.
Sale of Principal Residence: The tax bill made no changes to the rules in respect to gain exclusions from selling a principal residence.
Moving Expense Reimbursements: The moving expense deduction has been eliminated through 2025, with the exception of armed forces members on active duty who relocate upon military order.
529 Plans: The tax bill expanded the role of 529 plans to allow families to use up to $10,000 per child on private K-12 education tuition.
Estate tax, gift tax, and generation-skipping transfer tax: The estate tax and gift tax exemption has doubled from $5 million to $10 million for estates of individuals who deceased after December 31st, 2017, and for gifts made after December 31st, 2017; this amount will be indexed for inflation occurring after 2011 and is currently estimated at approximately $11.2 million in 2018.
The individual alternative minimum tax (AMT) exemption was not repealed as initially proposed, but there’s an increase to the exemption. The exemption amount has been increased to $109,400 for married taxpayers filing jointly, $54,700 for married taxpayers filing separately, and $70,300 for individuals aside from trusts and estates. The phaseout thresholds are now $1 million for married taxpayers filing jointly and $500,000 for any other taxpayer with the exception of estates and trusts. Both exemptions and thresholds are to be indexed for inflation.
The individual mandate
The penalty for individuals who do not have health insurance meeting government standards for minimum coverage has been eliminated and is in effect in 2018.
Continue to discuss taxes with a trusted professional
These key tax bill features that we’ve summarized do not fully encompass the more comprehensive aspects of the tax bill, but we hope that this letter will serve you with a starting point in navigating some of the broader areas of this legislation. At New England Investment and Retirement Group, we believe it’s important for clients to seek guidance tailored to their specific state of affairs. We encourage you to contact your tax professional to determine how the tax bill may affect your unique situation.