September 30, 2018

Virtually all taxpayers will be impacted in some way by the recent tax law changes. Here are 10 facts to help you determine how the tax act may affect you. Keep in mind, the tax changes will affect people differently, so we encourage you to speak with your financial professionals and tax advisor before you take any action.

  1. Tax brackets are lower. Municipal bonds may not be as tax efficient as they were before. Review your fixed income investment strategy, especially if you were previously in the 28% or 33% tax brackets.

  2. The standard deduction is raised to $12,000 (individual) and $24,000 (married filing jointly). Combined with limits on itemized deductions, this may make itemizing more difficult for you.

  3. Miscellaneous itemized deductions subject to the 2% floor are eliminated. This includes investment advisory fees, so you’ll no longer be able to take a deduction if you pay them from a taxable account. However, paying them from a tax-deferred account means you’ll have less money growing tax-deferred. You’ll need to weigh the pros and cons.

  4. State and local income tax, sales tax and property tax deductions are capped at $10,000. If you’ve been thinking about relocating, now may be the time to consider a more tax-efficient state.

  5. The deduction for charitable contributions is expanded to 60% of your adjusted gross income.  However, this only reduces your taxes if all your itemized deductions exceed the new standard deduction. To bolster your ability to itemize in one year, you could consider lumping several years of donations into a donor-advised fund. Then make all of your charitable contributions from the fund in subsequent years.

  6. Mortgage interest deduction limits are lower. For mortgages taken out on or after Dec. 15, 2017, you can only deduct interest on mortgage debt totaling up to $750,000 (or $375,000 for married couples filing separately). Also, you can no longer deduct interest on a home equity line of credit unless you use it to acquire or substantially improve your home. 

  7. You can now use 529 plans to fund K-12 private school expenses. Consider taking distributions of up to $10,000 per student per year for public, private and religious school expenses for grades K-12.

  8. The unified gift, estate and generation-skipping transfer exemption amounts are increased (until 2026).  With the estate tax exemption now at $11.2 million per person, your estate may no longer be taxable. Review your estate plan to ensure it allows flexibility to maximize tax elections. Consider lifetime gifting or asset shifting to take advantage of higher exemption amounts. 

  9. Pass-through entity owners may take a 20% qualified business income deduction. If you operate a sole proprietorship, LLC, S Corp., or partnership, you can deduct up to 20% of your qualified business income (subject to a few limitations). 

  10. The top corporate tax rate is now 21%. Therefore, if you operate a pass-through entity and your tax rate is above 21%, converting to a C Corp. may offer greater benefits than the 20% qualified business income deduction. Of course, a C Corp. is subject to double taxation, which could eliminate the benefit. A tax preparer can help you decide.

For additional details about the tax act and how it might affect you, speak with your financial professionals. As with all tax-related decisions, be sure to consult your tax advisor before making any changes to your estate plan, financial plan or business structure.   

 

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