Changes You Need to Know – Decoding the Tax Law

By: Chris Hostetler

You know the income tax code has changed for 2018, and you may have a vague idea of the impact to your situation.  Most taxpayers are getting offsetting doses of positive and negative adjustments, and it is time to start thinking about some of the details and the planning implications.

To help our clients start thinking about their personal situations, we hosted an educational event a few weeks ago to highlight some of the major changes in the new tax code.  In today’s post, we have a brief recap of the presentation for those who weren’t able to join us.  (This will also help those who attended but were too focused on the appetizers and mint juleps to pay attention.)

First off, much thanks to our presenter, Tyler De Haan, Director of Retirement Services at Principal Financial Group.  Tyler compiled and presented this information at our request.

And to get the ever-important caveat out of the way – we are NOT tax advisors or CPAs.  We encourage you to consult with your tax professional before acting on any of this information.

Without feigning to provide an all-inclusive list of the new tax rules – if you want to read the full 1,100 pages, knock yourself out – but here are some of the highlights:

  • Capital gains tax – Rates are unchanged.
  • Estate tax exemption – Raised to $11.2 million per person, almost double the previous exemption.  This is the amount that you can bequeath tax-free at your death. 
  • The standard deduction – Amount is raised to about double the amount of the previous deduction.  As Tyler explained the impact of this, the roughly 70% of tax filers who used the standard deduction in the past should see an increase in their deduction.
  • Personal exemptions – Gone.  The greatest impact of this is likely to be a higher tax bill for larger families, notwithstanding all the other changes.
  • Itemized deductions – The rules have changed.  Most of these adjustments reduce or eliminate deductions that were previously available.  Of note:
    • The mortgage interest deduction is limited to $750,000 of indebtedness on your first or second residence (previously $1 million).
    • State and local income tax deductions are now limited to $10,000 a year.  We expect this will primarily affect high earners and people in high-tax states.
    • Miscellaneous itemized deductions, such as fees paid to your investment advisor or tax professional, are no longer allowed.
    • One key exception to the general trend of reduced itemized deductions is in the area of charitable giving, particularly for taxpayers who donate amounts greater than the standard deduction.  Charitable giving can now be deducted up to 60% of your Adjusted Gross Income in the right circumstances, representing an increase from 50% previously. 
  • Charitable giving – Because of the interplay between itemized deductions and the now-higher standard deduction, many taxpayers will need to be more thoughtful about how they give to charity.  Several strategies that have been around for a while may become more popular: Qualified Charitable Distributions from IRAs, Donor Advised Funds, and bunching of gifts.  We’ll share another post soon with some thoughts on making the most of your charitable gifts.
  • Small business owners – Particularly affected by some provisions:
    • Qualified Business Income, a new concept, allows a 20% deduction for small businesses (subject to high-income limitations).  The rules on this are complicated, and the IRS still needs to clarify how certain aspects will be interpreted.
    • Business expense deductions for food and entertainment have new rules, and just about everybody agrees they are confusing.  To be safe, talk to your tax advisor.

 

Because the new tax code is less than a year old and nobody has filed 2018 taxes yet, it is still a challenge to parse out how all of the changes will work together.  We encourage you to ask your advisors whether you should consider any strategic changes.

 

This material is provided as a courtesy and for educational purposes only.  Hilltop Wealth Advisors does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation.  

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