The largest tax rewrite in decades passed through the House and Senate earlier this week, and all expectations are that President Trump will sign the bill into law in the coming days. Much has been written in the media about the proposed changes and we thought it would be helpful to share some changes that impact individuals and families, and outline a few planning ideas to discuss with your tax professional.
Tax law changes that would take effect on January 1, 2018, include the following:
- Lowering individual income tax rates, including a lower top bracket rate of 37% (was 39.6%)
- Elimination of the deduction for state and local income taxes, sales taxes, and property taxes in excess of $10,000
- Elimination of the deduction for miscellaneous itemized deductions (most common are CPA fees and investment management fees)
- Restrictions on deductible mortgage interest (deductible mortgage cap of $750,000 for the purchase of new homes) and an elimination of the deduction for mortgage interest on home equity lines of credit (existing mortgages prior to December 15, 2017, are grandfathered in)
- Modifying the Alternative Minimum Tax (AMT) for individuals so that it will impact fewer taxpayers. The phase out of the AMT exemption starts at $500,000 for single taxpayers and $1,000,000 for married taxpayers filing jointly
- Expanding the estate tax exemption equivalent to $11.2 million per taxpayer (indexed each year for inflation) from the current $5.49 million per person
- Increasing the standard deduction to $12,000 single and $24,000 married filing jointly
Although there are numerous changes and adjustments planned, the following items are not planned for amendment:
- The deductions for unreimbursed medical expenses (deduction for expenses over 7.5% of Adjusted Gross Income vs. 10% under current law)
- The deduction for charitable donations is expected to remain intact.
- The annual gift exclusion limits will remain at $14,000 per person in 2017 and increase as planned to $15,000 per person in 2018.
Given the implications of these new tax law changes, there are some items to consider addressing before the end of 2017 in addition to your regular year-end tax planning. As always, we strongly recommend speaking with your tax advisor before taking any of these steps as each taxpayer’s situation is different:
- Consider a prepayment of your 2017 property taxes and state income taxes if you are not subject to the AMT in 2017. State and local taxes will no longer be deductible in 2018, so paying all your 2017 property taxes and state income taxes related to the 2017 tax year by December 31 may allow you to receive a tax deduction for these items in 2017. As a cash basis taxpayer, if you wait to pay some of your 2017 income taxes in 2018, those tax payment amounts will not be deductible on your 2018 return as they will in 2017.
- If you are not subject to AMT and receive a tax deduction benefit for the fees you pay to your CPA, consider prepaying your 2018 tax preparation fees. CPA fees will not be deductible in 2018 under the new law.
- Continue your planned contributions to charities but confirm that you will receive the maximum deduction in 2017 vs. waiting to make the contribution in 2018. Charitable contributions are still deductible under the proposed law, but the tax deduction benefit may vary between the two tax years. Consult with your tax preparer to see if you will receive a larger tax benefit for a 2017 or a 2018 charitable gift.
- As always, if you have appreciated securities that you have held for at least a year, consider contributing those securities directly to a charity or to a charitable donor-advised fund in lieu of cash. Charitable donor-advised fund accounts allow you to take a tax deduction for the fair market value of the gift in the year you make the charitable transfer to the fund and then you can grant money to charities from the proceeds in the current year or a future year.
- Consider reviewing your home equity lines of credit. In the past, individuals could deduct mortgage interest on up to $100,000 of home equity debt, but the mortgage interest deduction for home equity loans has been eliminated under the new law. It may be time again to review your specific loan and its features and consider either refinancing at a lower rate or possibly paying down some or all the debt.
- If you are not subject to AMT, consider recognizing some long-term capital gains in 2017 that you were planning on recognizing in 2018. The combined tax rate on long-term capital gains in 2017 may be lower due to the ability for some taxpayers to deduct the state income tax on the gain in 2017 if the state income tax is prepaid before year-end.
Rest assured that we are consistently on the lookout for opportunities to help our clients optimize their tax situation and consider new strategies within the broader view of their wealth management goals and objectives. If you would like to discuss your situation further, and haven’t already been in contact with your Litman Gregory Wealth Advisor, please contact us soon. We look forward to working with you and your tax advisor to consider any potential actionable items relevant to your specific tax situation before year-end and into 2018.
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