With the tax season behind us, we look ahead to new opportunities and challenges presented by the most comprehensive change in Federal tax laws since 1986.
Changes are far-reaching, subject to interpretation and revisions, and will impact nearly every person, family and business. Figuring out a personalized strategy is critical to gaining better wealth outcomes.
People are wondering:
- How do the new tax laws affect me, my family, my business?
- Will these tax rules cost me money, or are there smart ways to benefit?
- How can I position myself, my family and my company to best stay ahead?
- What actions do I need to take NOW and in the coming years?
- What should I need to worry most about TODAY?
KEY #1: Many tax deductions you counted on in the past were substantially changed or eliminated. For those with higher incomes, new rules are needed to play this tax game and win.
- Nearly every bracket sees a 2% to 4% tax rate reduction, for an average savings of $1,600. However, because tax brackets were compressed, many higher earners will be worse off—some, much worse off.
- Everyone will gradually be pushed into higher tax brackets because based on new inflation measures (Chained-CPI), making tax credits and standard deductions less valuable over time.
- The standard deduction has nearly doubled to $12,000 for singles and $24,000 for married couples. Four out of five taxpayers will benefit. One out of five taxpayers likely will not.
- Miscellaneous itemized deductions are no longer allowed, but that is offset with alternative minimum tax relief.
- “Bunching” allowable deductions, especially involving charity, should be utilized one year and standard deduction only taken the next to cumulatively maximize year-over-year deductions.
- IMPORTANT: Dividends and capital gains tax rates remain the same under the new tax law.
KEY #2: Living in states like New York, Massachusetts and New Jersey will negatively impact many with new rules how state and property taxes are deducted.
- For many higher earners, touted tax savings from rate reductions of tax brackets will not be realized.
- Previously unlimited deductions for state, local and property taxes now are capped at $10,000.
- Interest deduction on new mortgages is now capped at $750,000, down from $1 million.
- Home equity loan interest is no longer deductible unless it is used in connection with home acquisition or improvements. Home borrowings for college tuition would not be deductible.
KEY #3: Family-related tax rule changes regarding high-earning couples, children, education, divorce, retirement and estate planning need immediate attention.
- A $2,000 per child tax credit (up from $1,000) and $500 for non-child dependents may be claimed with up to $1,400 refundable credit! No phase outs until $200,000 for singles and $400,000 for marrieds.
- 529 college savings plans are now “educational” plans, allowing up to $10,000 annually to be applied for K through grade 12 private education.
- Alimony will no longer be deductible after 2018 (until sunset), nor will it be income to the payee.
- Roth IRA conversions can no longer to reversed (recharacterized), so get your timing right.
- Federal tax law benefits estates valued up to $11 million for individuals but sunsets to $5.5 million in 2025. New York State estate tax is still $5.5 million, with a “cliff” surcharge back to $1.
- IMPORTANT: Wills and trusts should be checked for language that could accidentally disinherit certain heirs or increase NYS taxes because of temporarily increased federal estate tax exemptions.
KEY #4: All businesses have new opportunities and choices regarding what taxes are paid and how deductions and depreciation are claimed.
- The corporate tax rate is now 21% and the corporate AMT has been eliminated.
- Many self-employed business owners are allowed to take a 20% deduction for qualified “pass-through” business income (which may be enhanced for S Corp owners), phasing out between $157,500/$315,000 and $201,500/$415,000 (single/married).
- Business owners should consider reorganizing their firms for preferential tax treatment, and carefully review new depreciation rules on deductibility of capital equipment and other assets.
OPPORTUNITY: While most will see lower taxes from the new tax law, some with higher incomes could easily pay much more. A professional specialist is needed more than ever for optimal tax outcomes.
Professional Financial will host a Tax Briefing at Monroe Golf Club on Thursday, August 9th at 5:00 PM. Simply call (585) 218-9080 x4 for reservations. Seating will be limited.
Topics to be covered include:
- How the new tax law seriously impacts your retirement planning strategy.
- The inflation calculation change in the tax code leading to higher future taxes.
- Why paying off your mortgage sooner may be smarter than ever before.
- Why 529 savings plans aren’t only for college anymore, and what that means for planning.
- Why small business owners could only be taxed on 80% of their business income.
- Why reorganizing your business into a different entity might be a valuable strategy.
- How special types of qualified retirement plans may allow some to multiply tax savings.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a wealth management professional prior to making any investment decision.
Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.