Please also keep in mind that there are hundreds of articles being published by the mainstream media as I write this that are laced with both fact, opinion, and speculation. I encourage you to take all this with a healthy dose of “wait and see” skepticism because journalists interpreting a 1,000-page bill on our complicated tax code in two days is a recipe for misinformation. Now, with that advice, on to my early thoughts.
The good:There are several items that will benefit our clients. Most notably is that all the tax bracket rates have been lowered. Essentially this reduction is 3-4% at each marginal tax rate. Another benefit is that the Alternative Minimum Tax (AMT), which traps a lot of our clients, should become a rare site. It is not eliminated, but I don’t think it will capture many people.
For our business owners, “pass-through” income from LLC’s, partnerships, and S Corporations receives a lower rate than ordinary income. Unless, of course, you are a professional service firm such as a law firm, CPA firm, or WealthPoint.
There is also a win for couples whose net worth is between $11 million and $22 million. The estate tax exemption is doubling, and those folks will end 2017 with an estate tax problem but begin 2018 without one. This drastically lessens the number of people who need to reduce their taxable estate to avoid this tax.
Clients who utilize 529 Plans for education savings can now use up to $10,000 per year toward private school expenses for grades K-12. The old rule only allowed for college expenses as a qualified withdrawal.
There are some other good items that are not changes, but things left alone:
1. There was no change to the qualified dividend and capital gain rates.
2. They scrapped the idea of mandating FIFO (first in, first out) accounting of stock or mutual fund shares when selling holdings, which had the potential to significantly increase taxes for our clients with large taxable accounts.
The not-so-good:Tax rates may be going down, but it does not automatically mean tax bills will go down. That is because of the big changes to itemized deductions. First, the deduction on any combination of property, state, local, and sales taxes is capped at $10,000. For our clients with multiple homes, who have a large amount of property tax in addition to state tax, this is a huge reduction. This alone can offset the lower rates and then some. Mortgage interest is changing, but I see that impacting very few of our clients.
The other big change is that miscellaneous itemized deductions are being eliminated. Common items here were investment expenses (like WealthPoint advisory fees), tax return expenses, and unreimbursed business expenses. In exchange for these changes, the standard deduction is doubling to $24,000 for married couples. Especially with the taxes cap impact, many people will no longer itemize their deductions and instead take the flat standard deduction. For our retired clients who (ideally) don’t have mortgage interest, it means that the first $14,000 of charitable gifts do not change their tax picture because it will take that much to just get up to the standard deduction amount.
Another not-so-good item is the Kiddie Tax changes. The new law changes the tax rates for minor children’s non-earned income (think investment income) to follow trust tax rates instead of their parent’s tax rates. For middle-income taxpayers, this is likely a higher tax rate.
Actions to take:If you are contemplating charitable gifts yet in 2017, these gifts might benefit you more in 2017 than waiting until 2018.
If your kids have custodial accounts and you want to use that money for college in the next year or two, you should consider the merits of selling appreciated holdings now instead of 2018 because of the higher Kiddie Tax rates.
If you are over 70 ½ year old and taking Required Minimum Distributions from an IRA, making charitable gifts from the IRA could be even more beneficial than before. Remember, you can donate up to $100,000/year even if that amount is more than your required distribution.
If you make estimated tax estimates, it may benefit you to make the final state tax estimate before year end. If you pay AMT that goes away so check line 45 of your 2016 tax return to see if you get hit with AMT.
This is not an extensive list of the tax rules, but rather items that likely impact many WealthPoint clients. As you know, tax rules are complex. It is going to take time, probably months and even years, for planning ideas to solidify around the new tax rules. We are happy to discuss any of these items with you in more detail, so feel free to contact any of the WealthPoint team members if you have specific questions.