The first big overhaul to the tax system has officially been signed into law by President Donald Trump. Many claims have been made that the tax bill was intended to simplify the massive tax code that already amassed over 2,600 pages but the complicated changes have made taxpayers more uncertain than ever of how to proceed.
For the most part, you should not expect your taxes to increase. In fact, the nonpartisan Joint Committee on Taxation calculated that the changes from this tax bill will increase the federal deficit by $1.46 trillion over the next decade.
Although we have only a little over a week left of 2017, there are a couple strategic moves you can make to reduce your overall tax liability in 2017 that may not be available in 2018.
Itemized Deductions vs. Standard Deduction
The standard deduction has been increased to $12,000 for single filers and $24,000 for married couples filing jointly, and many of the itemized deductions have been capped at a maximum deduction. Due to these two factors working together, it may not benefit you to itemize in 2018, when you did in 2017. Because of this, it may benefit taxpayers to pay property taxes, state estimated taxes, tax preparation fees, and charitable contributions prior to December 31st.
Example: A single filer has itemized deductions totaling $7,400 in 2017 and has a federal marginal tax rate of 25%. The taxpayer’s real estate tax payment of $1,000 is not due until April, and the taxpayer planned to make a $400 charitable contribution in January of 2018. Assuming the taxpayer has approximately the same itemized deductions for 2018, the addition of the $1,000 real estate tax and $400 charitable contribution would increase the itemized deduction total to $8,800. However, the taxpayer would benefit more from the standard deduction of $12,000, so they take the standard deduction. Therefore, no tax benefit is received for the payments made for the real estate taxes or the charitable contribution. If the taxpayer had made the $1,000 real estate tax payment and the $400 charitable contribution prior to year-end, they would have received tax savings of $350 ($1,400 * 25%).
The other changes to the tax code provide planning opportunities for the years to come, but nothing needs to be accomplished before year end. Here’s a quick look at the major provisions in the final bill:
You are no longer required to pay a shared responsibility payment if you do not have health insurance as of January 1, 2019. (Don’t go cancelling your policy just yet, we still think it’s a great idea to have health insurance)
There are still seven tax brackets for individuals, but the rates for these brackets have been lowered to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. See full tables here.
The deduction for each taxpayer, spouse, and dependent in the household is gone, reducing tax breaks for larger families.
Child Tax Credit
The families with children are not out of luck completely. The child tax credit for children under 17 has increased to $2,000 per child and can be taken by single filers who make up to $200,000 and married couples who make up to $400,000 per year.
Taxpayers may take a $500 credit for each non-child dependent whom they’re supporting, such as a child that is over 17, a parent, or adult child with a disability.
Mortgage Interest Deduction
The mortgage interest deduction has been limited to the interest attributable to a maximum mortgage amount of $750,000 (previously, this was capped at $1 million)
Sales and Local Income Tax
The deduction for sales and local income tax has been limited to $10,000, including property and real estate taxes.
Alternative Minimum Tax
The income exemption levels have been increased to $70,300 for single filers and $109,400 for married couples filing jointly.
This is letdown for those who have spent copious amounts of time planning and strategizing their estate plan to preserve the taxpayer’s assets. The threshold doubles the exemption amount from the current amounts of $5.49 million for individuals and $10.98 million for married couples. Even at the current exemption amounts, only 0.2% of estates ever end up being subject to the estate tax.
Pass Through Entities
Owners, partners and shareholders of S-Corporations, LLCs and partnerships now receive a 20% deduction on their income that passes through to their personal return from a Schedule K-1. For service based businesses, this deduction is eliminated once your taxable income reaches $315,000 if married, or $157,500 if single.
Corporate Tax Rate
The corporate tax rate is cut down from the current 35% to 21%. The alternative minimum tax system for corporations was also repealed.
If you’re curious to read the bill in it’s entirety (or if you’ve had some trouble sleeping lately), follow this link: