Tax Cuts and Jobs Act - Individual Taxes
With the passage of the Tax Cuts and Jobs Act (“Act”), there is much concern, as well as confusion, as to the impact the new legislation has on both businesses and individuals alike. The tax changes contained in the Act are the most sweeping since the Tax Reform Act of 1986. As with any tax change, there will be winners and losers, but all taxpayers should be familiar with how the new legislation could impact their specific situation. Below we address the impact on individual taxes.
CONSIDERATIONS BEFORE YEAR-END
Should you pre-pay your state taxes? The new legislation limits this deduction to $10,000 between state and property taxes in 2018, so it is important to maximize its effect this year. That said, if you are subject to Alternative Minimum Tax (AMT), you may not benefit from the deduction. There had been some discussion about prepaying your 2018 state and local income taxes this year, but the final version of the bill prohibits taking that deduction on this year’s return. If you are holding a bill for real estate taxes due in 2018, then you may be able to pay, and deduct, that amount, depending on your specific situation. If you have a Q4 2017 state tax payment that was otherwise due in January, you should consider paying it in December. Even if you are in AMT, prepaying the Q4 state tax payment can reduce your Net Investment Income Tax (NIIT) liability.
Consider whether any charitable contributions should be paid by year end. Since the top income tax bracket is going down, there could be a greater benefit to you by paying and deducting contributions in 2017, as opposed to a later tax year. On the other hand, your effective tax rate could actually be higher next year with the loss of the state tax deduction and the increase in the standard deduction, so it might be beneficial to put off the deduction until next year.
The standard deduction is increasing to $24,000 from $12,700, so if your mortgage interest and charitable contributions (the only two remaining itemized deductions of considerable size) are less than that amount, you should consider bundling your charitable contributions into one year. One thought is that every other year you would pay twice the amount paid in one year, so that you exceed the standard deduction amount in order to maximize the benefit of your charitable contributions.
LONGER TERM CONSIDERATIONS
Changes to pass-through taxation are significant in the new bill. We will need to wait as more details are released, but at some point, there may be the opportunity to restructure to take advantage of these lower tax rates.
With the doubling of the lifetime gift exemption to $11.2 million per person, fewer estates will be subject to estate tax. Consideration should be given to making those gifts sooner, rather than later, to lock in the benefit before it is scheduled to revert to the lower amounts in 2026.
The standard deduction is nearly doubling. For example, for married-filing-joint, the standard deduction is increasing to $24,000 from $12,700, so if your mortgage interest and charitable contributions (the only two remaining itemized deductions of considerable size) are less than that amount, you should consider bundling your charitable contributions into one year. One thought is that every other year you would pay twice the amount paid in one year, so that you exceed the standard deduction amount in order to maximize the benefit of your charitable contributions.
Alimony, relating to any divorce or separation agreement executed, or potentially modified, after December 31, 2018, will not be deductible by the payor spouse and will not be included in the income of the payee spouse.
OTHER RELEVANT ITEMS WITHIN THE TAX BILL
Individual rates and brackets have been revised, and overall rates are generally lowered, with the top rate dropping from 39.6% to 37%. These tax cuts are scheduled to expire after 2025, and there is no change to the preferential long-term capital gains tax rate.
Taxation of carried interest, for those who are members of firms such as private equity and hedge fund businesses, a new three-year holding period is required to qualify for the capital gains treatment.
Mortgage interest deductions for new purchases of first or second homes will be capped at $750,000 in mortgage debt for mortgages incurred after December 15, 2017. There are no changes for current mortgages put into place under prior rules. However, home equity loan interest is no longer be deductible, even for existing debt.
The bill retains, but modifies to some degree, the individual AMT. An increase in the income level exemption and elimination of state tax deductions likely reduces the number of taxpayers subject to AMT.
For eligible taxpayers, the child tax credit is increased, from $1,000 to $2,000, and a $500 credit is provided for certain non-child dependents.
Distributions from 529 Plans can be used to fund tuition and various expenses at elementary, secondary and religious schools. Historically, distributions were limited to postsecondary education.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.