Since 2017 is winding up, I wanted to pass along a quick summary of the tax bill. If you are one of the many Americans who will no longer be itemizing under the new bill, you may want to do some planning before the New Year arrives.
Tax Brackets for Individuals
The biggest change will be to the tax brackets. Original proposals called for reducing the current seven tax brackets to just three. While that didn’t make the final cut, the new tax brackets will be lower for almost everyone.
Current tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
New tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Note that these are only temporary; they will revert to the current tax brackets after 2025.
| Single | Joint | ||
| 10% tax bracket | $0 – $9,525 | $0 – $19,050 | |
| Beginning of 12% bracket | $9,526 | $19,051 | |
| Beginning of 22% bracket | $38,701 | $77,401 | |
| Beginning of 24% bracket | $82,501 | $165,001 | |
| Beginning of 32% bracket | $157,501 | $315,001 | |
| Beginning of 35% bracket | $200,001 | $400,001 | |
| Beginning of 37% bracket | $500,001 | $600,001 |
The rates for long-term capital gains and qualified dividends remain unchanged at 0%, 15% and 20% depending on which tax bracket you are in (the income ranges are similar to 2017 with small inflation adjustments).
Planning Tip: If possible, try to push or defer 2017 income to 2018 (not an easy task with just a little over a week left in 2017; however, if you can increase retirement contributions or other deductions before year-end this will help reduce your taxable income for the year).
Standard and Itemized Deductions
Another change that will impact many people is that the standard deduction was increased substantially. For 2018, the standard deduction for individuals under the old law was $6,500; under the new law it will be $12,000. For married taxpayers, the standard deduction is increasing from $13,000 to $24,000.
Many people that itemized deductions in the past will now be taking the standard deduction.
However, for those who will still be itemizing deductions, there are a few other changes that may impact your deductions.
Medical expenses above 7.5% will be deductible. The AGI floor under pre-existing law was 10%.
State and local taxes (including income taxes, real estate and personal property taxes) will be limited to $10,000.
Home mortgage interest deduction will be limited to the first $750,000 of debt incurred.
Casualty and theft losses will only be deductible in federally declared disaster areas only.
Job expenses, moving expenses and most miscellaneous deductions will no longer be deductible.
Planning Tip: If you currently itemize but will not be able to under the new law you should consider increasing your charitable donations for 2017 (many people will double up their 2017 donations and decrease 2018 donations).
Planning Tip: If you make estimated tax payments, make your fourth state estimated tax payment before December 31. Also, make sure you pay all property taxes before the end of the year. If you live in a county or state that allows you to prepay property taxes (Jackson County, MO does not), consider prepaying your 2018 property taxes.
Personal Exemptions
Under the old law, taxpayers were able to deduct $4,150 for themselves, their spouse and any dependents. The new law eliminates the personal exemption. Unfortunately, the higher standard deduction may not make up for the loss of the personal exemptions for many families.
Child Tax Credit
To make up for the loss of the dependent exemption, the new law increased the child tax credit from $1,000 to $2,000. In addition, the maximum refundable amount was increased to $1,400. The income limit for the credit was increased substantially (from $75,000 to $200,000 for single taxpayers and from $110,000 to $400,000 for married taxpayers) so more people will qualify for the credit.
These changes are temporary and will revert to previous tax law after 2025.
Alternative Minimum Tax (AMT)
Early proposals eliminated the AMT. While the AMT survived the final bill, the exemption amount was increased from $86,200 to $109,400 for married tax payers, so less people will be subject to AMT.
Retirement Plans
Contribution levels for retirement plans will remain the same under the new plan. The main change under the new plan is that people will no longer be able to recharacterize (or undo) Roth conversions.
Health Insurance
The requirement that individuals must be covered by a health care plan with minimal essential coverage has been eliminated. People will no longer be penalized for failing to maintain coverage after December 31, 2018.
Estate Tax
The estate and gift tax exclusion has been doubled under the new law to $11,200,000. This provision ends after 2025.
Business Tax Provisions
The maximum corporate tax rate under the new tax law is 21%; the alternative minimum tax for corporations has been eliminated.
Individual taxpayers can deduct 20% of business income (not including wages) from a partnership, S corporation or sole proprietorship. The deduction is limited to 50% of W-2 wages.
As typical, Congress waited until the last minute to pass the new tax law, giving Americans little time to plan for the upcoming changes. Even so, I hope this summary was helpful. Happy Holidays!
Kristine McKinley is a fee only financial advisor in Kansas City, Missouri. Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis. To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.