posted by: Radnor Financial Advisors
As the Senate and the House have issued and passed the final version of the Tax Cuts and Jobs Act (officially known as “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018”), here is a summary of some key aspects.
Please note that many of these aspects are set to expire (requiring additional congressional action to extend) in 2025 and actions to take prior to year-end are somewhat limited.
1. Tax Brackets – While the number of tax brackets remain the same (7), the top 6 brackets have been lowered. As such, individuals may see their marginal tax brackets decreased in the short-term but also offset with the potential removal of previously available deductions and exemptions.
2. Standard Deductions/Personal Exemptions – While the standard deduction amounts will almost double ($24,000 for married couples and $12,000 for individuals) the personal and dependent exemptions have been eliminated. To offset, the child tax credit is doubled to $2,000 and the phaseout thresholds are substantially increased.
3. Itemized Deductions – By far the biggest area of change for individual taxpayers will be in itemized deductions.
4. Trust and Estates – The tax brackets for estates and trusts have been consolidated and also lowered. The estate tax remains; however, the lifetime gift/estate tax exemption has been doubled, allowing individuals to transfer $11.2 million tax-free (and couples have a combined exemption of $22.4 million).
5. Children – Parents may now use 529 funds to pay for private school tuition up to $10,000 annually. Those families subject to Kiddie Tax are likely to see a tax increase, as the child’s unearned earned will no longer be taxed at the parent’s marginal rate, but at the (presumably) higher trust tax rate. As such, 529 accounts become even more attractive and taxable custodial accounts (including UTMAs) may not be tax-efficient.
6. Pass-Through Entities – With the exception of certain “professional service” business owners (law firms, investment advisors, etc.), non-C Corp business owners, including sole proprietors, will receive a “below the line” deduction on their individual tax return for 20% of business income. Some “professional service” income will qualify but subject to phaseouts based on total taxable income.
7. Roth Recharacterization – Taxpayers will no longer be able to recharacterize prior-year Roth conversions. (Note that for 2018, taxpayers will be allowed to recharacterize any conversions made in 2017). Moving forward, Roth conversions are still allowed.