What Does Tax Reform Mean for Individual Taxpayers? by Tony Gutierrez, CPA
According to the Tax Policy Center, the Tax Cuts and Jobs Act (TCJA) will result in reduced tax liabilities for 95 percent of all taxpayers across all income levels in 2018. High-income earners may have the most to gain temporarily with a larger average tax cut as a percentage of their after-tax income, at least for the next eight years. In its current state, the law calls for many of the provisions affecting individuals to sunset at the end of 2025. However, it is important for individuals to recognize that the entirety of the legislation is subject to modification as the winds of political power change during a period of time in which there will be two presidential election cycles.
With these factors in mind, families must tread carefully. Under the guidance of experienced advisors, families will find opportunities to maximize the law’s temporary benefits while keeping an eye on the future and preparing their wealth and estate plans for a broad range of possibilities.
Under the TCJA, almost all taxpayers will receive a reduction in their marginal income tax rate, which maxes out in 2018 at 37 percent on taxable income over $500,000 for individual filers and $600,000 for married couples filing jointly. In 2017, the top rate was 39.6 percent on taxable income exceeding $418,400 for single filers and $470,700 for married couples filing jointly.
Income Tax Deductions
On paper, it appears that the new tax code is unfavorable in terms of deductions and credits it allows taxpayers to claim to reduce their taxable income. For example, between 2018 through 2025, taxpayers may no longer claim deductions for interest on home equity loans or miscellaneous itemized expenses for fees paid to lawyers, accountants and investment advisors. The law also eliminates deductions for alimony paid to a former spouse when a separation agreement or final divorce decree is entered into after Dec. 31, 2018, and it limits the deductibility of personal casualty losses to only property located in a presidentially declared disaster area.
Additional deduction limitations that have been receiving a lot of media attention include the $10,000 cap on state and local tax payments and the limit on mortgage interest deductions for new mortgages beginning in 2018.
On the positive front, the new law nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing joint returns. In addition, taxpayers who elect to itemize deductions will no longer be restricted to a 3 percent of adjusted gross income (AGI) limitation. In fact, the new law also increases to 60 percent of AGI the amount of deductible cash contributions taxpayers may give to charity. This provides high-net-worth families with the ability to leave behind a lasting legacy and give substantial sums to charitable organizations.
Estate and Gift Tax
Congressional republicans who called for eliminating the estate tax lost their battle during the very brief negotiations over tax reform. However, under the final legislation, only a small percentage of ultra-high-net-worth Americans will have to worry about the estate tax for the next eight years. Beginning in 2018, the estate and gift tax exemptions double and allow individuals to avoid taxes on assets of $11.2 million or less for individuals or $22.4 million or less for married couples filing joint tax returns. Estates valued above these thresholds will be subject to a 40 percent tax. The exemption is indexed with inflation but will revert to its pre-TCJA levels in 2026.
Even with the significant increase in the estate and gift tax exemption, it is critical that families plan carefully under the guidance of advisors who are well-versed in the tax code and the tools and strategies available to preserve wealth for multiple generations.
Other Provisions Affecting Families with Children
The TCJA introduces a new use for 529 college savings plans, for which families who fund these vehicles may take annual tax-free distributions of up to $10,000 through 2025 to pay for their children’s K through 12 private or religious school tuition. When individuals contribute $15,000 or less per year, per beneficiary, to a 529 plan, they can avoid federal gift tax on those amounts. For married couples, the exclusion is as high as $30,000 per year, per beneficiary. However, donors with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for as many children as they wish by contributing five years of tax-free dollars in one single year. For single taxpayers, the maximum lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may set aside $150,000 free of gift taxes and allow those dollars to grow free of capital gains taxes in a 529 plan for each of their children and/or grandchildren. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which the TCJA doubled from the previous level to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns.
Because the TCJA represents the most significant change to the tax code in more than 30 years, individuals will need to take the time to understand the law and change the way they typically plan for tax efficiency and wealth preservation. Advance planning is key under the direction of professional advisors who are keeping a watchful eye on the IRS and the technical guidance the agency will issue to apply the new law and who have the knowledge to develop appropriate strategies to meet taxpayers’ unique circumstances, needs and goals.
About the Author: Tony Gutierrez, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses conducting business in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at firstname.lastname@example.org.