Understanding The New Tax Law

Understanding The New Tax Law

View and download the in-depth .pdf

1/11/2018
tax planning

A brief summary..
Major tax reform typically only occurs once every decade or so. But after a tumultuous series of negotiations in both the House and Senate, a final reconciled version of the Tax Cuts and Jobs Act of 2017 (TCJA) has just been signed into law.

The legislation will result in substantive tax reform for corporations, with the elimination of the Alternative Minimum Tax (AMT) and consolidation down to a single 21% tax rate, all of which are permanent. However, when it comes to individuals, the new legislation is more of a series of cuts and tweaks, which arguably introduce more tax planning complexity for many, and will be subject to another infamous sunset provision after the year 2025.

Nonetheless, the new tax laws have a lot to like for individual households, almost all of whom will see a reduction of taxes in the coming years (though not after the 2025 sunset). While 7 tax brackets remain, most are decreased by a few percentage points (to a top rate of 37%), along with the repeal of the Pease limitation, which reduced the value of itemized deductions for high income taxpayers.

The AMT remains, but its exemption is widened. Most common deductions remain, though they are more limited, and an expanded standard deduction means fewer will likely claim itemized deductions at all in the future.

There is a new crackdown on the Kiddie Tax (subjected to trust tax rates instead of parents’ tax rates), but a much wider range of families will benefit from an expanded Child Tax Credit (with drastically higher income phaseouts). And, a doubling of the estate tax exemption amount – to $11.2M for individuals, and $22.4M for couples with portability, will make estate tax planning irrelevant in 2018 and beyond for all but the wealthiest of taxpayers.

Of particular interest for investors are a number of key provisions. The controversial rule that would have eliminated individual lot identification, and required all investors to use “first in, first out” (FIFO) accounting, is out and not included in the final legislation. However, also out is the ability to deduct any miscellaneous itemized deductions subject to the 2% of Adjusted Gross Income (AGI) floor – which means all investment advisory fees will no longer be deductible starting in 2018.

In addition, several popular Roth strategies will be curtailed by the repeal of recharacterizations of Roth conversions (although the backdoor Roth rules remain).

While the deduction for pass-through businesses remains in place in the final legislation and may be appealing for “smaller” businesses, the service business treatment is so unappealing, that large pass through businesses may soon all convert to C corporations (or at least, become LLCs and partnerships taxed as corporations under the “Check The Box” rules).

Ultimately, the new tax rules are actually complex enough that it will likely take months or even years for all of the new tax strategies to emerge; from when it will (or won’t) make sense to convert to a pass-through business, to navigating the new tax brackets, and the emergence of strategies like “charitable lumping” in order to navigate a higher standard deduction.

Ongoing tax complexity means there will continue to be a need for tax planning advice, and VFA is here, ready to provide it.

Should you have any questions about this information please contact your Vermillion Financial Advisor to discuss your personal tax situation, and see what steps you may need to take in the future.

View or Download New Tax Law Overview .pdf