This year will be remembered for a sweeping tax overhaul with significant implications for most of our clients. With the changes imposed by the Tax Cuts and Jobs Act of 2017 effective only five business days after it was signed into law by President Trump on Dec. 22, no one was left with much time to make adjustments.

Major alterations include roughly doubling the standard deduction, eliminating personal exemptions, doubling the child tax credit, repealing or significantly limiting many itemized deductions and lowering most tax rates slightly while adjusting income thresholds for each bracket. As a result, many more taxpayers will claim the standard deduction.

Here are some suggested actions you can start taking — or discuss with your Altfest advisor — now.

Housing

Lots of attention has been given to how the new tax law will affect housing deductions. In a nutshell, the government has taken away some of the incentives to own a home. Fewer people will gain a tax benefit by having a mortgage and paying real estate taxes.

If you are married and filing jointly and your annual payment of property and state and local tax exceeds the $10,000 you can deduct, you will not get a tax benefit for the next $14,000 of deductions (for example, mortgage interest expense) unless your deductions, in total, surpass the $24,000 standard deduction ($26,000 for seniors filing jointly).

So what can you do?

First, interest on investment or business debt continues to be deductible. Second, if you are self-employed and work out of your home you may be entitled to a home office deduction. This will allow you to partially deduct your mortgage interest and property taxes. If you have a vacation home or rental unit in your home, you can still deduct taxes and mortgage interest related to the rental activity from your rental income. Because those expenses may not otherwise be deductible, there is now a greater incentive to rent out your property.

Planning for the Charitably Inclined

The new law largely left charitable deductions intact, but there are several changes with indirect implications. Due to the increased standard deduction and repeal of a number of itemized deductions, many more taxpayers will no longer see a tax benefit on some or all of their charitable donations.

For example, if your only other deductions are the maximum $10,000 in state and local income taxes and you donate $2,000 in 2018 to your favorite charities, your itemized deductions will total $12,000 for the year. Because that is now the standard deduction for an individual, you receive no tax benefit from the donation. You can mitigate this by combining several years’ donations in a single tax year. If you made $8,000 in charitable donations in one tax year, your itemized deductions would total $18,000, exceeding the standard deduction by $6,000.

Building on this technique, you could deposit the $8,000 into a Donor Advised Fund (DAF). The DAF acts as a charitable pass-through allowing recommendations on when, how much and to what charity your DAF should send a check. Another option for retirees over 70 is a Qualified Charitable Donation (QCD), which is a transfer directly from a pretax retirement account to a registered charity, reducing taxable income.

Estate Taxes

While it looked during congressional deliberation over the tax bill as if the federal estate tax might be erased, in the end exemption limits were doubled to $11.2 million per person, or $22.4 million for a couple. However, those who think the new, large exemption amount means that they no longer need to think about estate tax planning could be in for an unwelcome surprise.

There are still two important factors that could make estate taxes material for some. The first: While federal limits are moving up, there are still 15 states with their own estate or death tax systems, and these can have much lower limits.

Second, the estate tax provision, like almost all personal tax law changes, will “sunset” in 2026. This fact mandates flexible estate documents that accomplish the decedents’ goals both with the new  exemption amounts and in case there is a reversion to lower, 2017 levels.

The estate and gift tax exemption is now double the previous amount, if portability is elected. But, as with many of the other changes for individuals, this is set to expire in 2026. If you are affected by this tax change, this is a good time to re-evaluate your estate plan. Gifting today, or evaluating undoing estate planning to gain a step-up of your basis of appreciated assets at death, are things that can be considered.

Corporate and Business Taxes

A reduction in corporate tax rates was a major feature of the new tax policy. Businesses structured as C corporations will see their top tax rate drop to 21 percent from 35 percent. Some self-employed workers and small-business owners who operate pass-through entities also may see some benefit, but the details are much more complex.

The benefit for pass-through entities comes from a 20-percent deduction on “qualified business income” claimed on the tax return of the individual who receives the pass-through income. However, it would be prudent not to celebrate too quickly.  There are many businesses that will be left out of this benefit at higher income levels, including accountants, attorneys, healthcare professionals and financial services companies.

All of these potential tax savings for both C corporations and pass-through businesses should prompt owners to re-evaluate their current structure and see if a change might be beneficial.  It is important to stress that this decision should be made only after speaking with your tax advisor. There are many factors that should be taken into consideration other than just the new tax rates.

This is an abbreviated summary of the biggest changes in the new tax law. We are happy to discuss potential effects and opportunities in much greater detail, based on your circumstances.

 

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Andrew Altfest, CFP^®, MBA, is Altfest’s President. James Basset, CFA, is a financial advisor at the firm, developing and executing financial plans that help clients achieve their goals.

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The foregoing content reflects the opinions of Altfest Personal Wealth Management and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

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Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.