Here are some highlights from the newly enacted Tax Cuts and Jobs Act and how the changes may impact you.
When does the new law go into effect?
Note that none of the changes are retroactive to 2017 and will take effect for the tax filing year of 2018. That being said, many Americans will see some of the bill’s impact by February in the form of lower income tax rates.
According to the Tax Policy Center, 143 million Americans will pay lower federal income taxes in 2018, compared to 8.5 million who will probably pay more.
What kind of changes can we expect?
There will now be seven tax brackets, which are generally lower than current income tax brackets. However, unless extended, these brackets expire in 2025 and return back to our current rates.
Because the income tax rates will be lower, employers will take out less money from workers’ paychecks. Therefore, many Americans will see their take-home pay rise.
On average, people earning $10,000 or less per year can expect to keep an extra 0.1%, $500,000 or more per year an extra 4%, and those earning between $50,000 and $75,000 per year an extra 1.5%. The Joint Committee on Taxation reported similar results.
The people who are not likely to see a benefit will be those that live in states where there are high state and local income taxes and/or high real estate taxes, similar to Washington, D.C., Maryland and Virginia. (The new laws limit those deductions to $10,000 a year in total.)
The new law also eliminates personal exemptions; and many expenses, such as moving expenses, casualty losses, tax preparation services, work-related expenses, etc., no longer will be deductible. In exchange for losing these exemptions, the standard deduction, which is currently $6,350 for individuals and $12,500 for married couples, will almost double.
Because of the loss of personal exemptions and the limitation on state and local income and real property taxes, some families and individuals will not see a reduction in their overall income taxes, but may actually see an increase.
The higher child care and dependent care credit may be helpful to those with children.
The good news for participants in 401(k) and 403(b) or government savings plans is that the contribution limit rises $500 in 2018 to $18,500 ($24,500 if you are 50 or older). You should consider taking advantage of this by contributing more, thereby lowering your taxable income.
How are corporations impacted?
The law permanently reduces the corporate tax rate from 35% to 21%.
The law also repeals the current 20% corporate Alternative Minimum Tax (AMT), exempts companies from paying tax on money earned overseas, and lowers the repatriation tax from 35% to between 8% and 15.5%. This is expected to drive higher earnings for a large number of companies.
The tax overhaul limits the net interest payments a company can deduct to 30% of its earnings before interest taxes, depreciation and amortization. Levels above that would be taxed.
How is the estate tax impacted?
The effort to repeal the federal estate tax failed.
For the next eight years, until Dec. 31, 2025, the estate, gift and Goods and Services Tax (GST) tax exemption doubles to about $11 million per person (or $22 million for a married couple). On Jan. 1, 2026, the exemption is cut in half.
If your assets are greater than $11 million per person (or $22 million for a married couple), consider using the entire exemption for estate, gift and GST tax during the next eight years; this may be a “use it or lose it” situation.
If the political winds in Congress change before Dec. 31, 2025, the estate, gift and GST tax exemption may also change. Therefore consider “estate freeze” techniques, such as Grantor Retained Annuity Trusts (GRATs), Irrevocable Trusts, Defective Grantor Trusts, etc.
Unless you are sure you are going to die prior to that date, still plan as if the estate, gift and GST tax exemption were at the current $5.5 million level, with a 40% estate tax on anything above the exemption amount.
Review and revise your current estate plan to check to make sure the provisions of your estate documents are still consistent with your family situation, given the new temporary increase to the estate, gift and GST tax exemption, and to make sure that your assets will pass to your desired beneficiaries in the most advantageous manner, such as to protect the inheritance from your beneficiaries’ lawsuits, creditors, nursing home costs, divorces and second marriages.
The Bottom Line
The new tax bill will impact all Americans one way or another. Now is the time to speak with your accountant, financial adviser and estate planning attorney to determine how you will personally be affected by the new laws and to discuss what, if any, adjustments you should make in turn.
Gary Altman, Esq., is principal and founder of Altman & Associates, which has offices in Columbia and Rockville. He can be reached at 301-468-3220.