As you are no doubt aware, Congress recently passed what is being called the most sweeping overhaul of the U.S. tax code in over 30 years. The voluminous bill includes many changes to the tax code that, depending on your individual situation, may significantly affect your gift, estate, and income liability going forward. Although it would be impossible to summarize all of the provisions of the tax bill in this short article, we have listed a few key changes below that may affect your tax situation in 2018 and beyond.
Changes That Will Affect Individuals
Tax brackets and Tax Rates
The bill modifies the federal income tax brackets for individuals and married couples and the tax rates associated with each, effective January 1, 2018. Note that the individual provisions listed here all expire December 31, 2025.
Standard Deduction, Personal Exemptions, and Child Tax Credit
The bill nearly doubles the standard deduction and eliminates personal exemptions. The Child Tax Credit is doubled to $2,000 for each child (up from $1,400) under 17. The bill also creates a new Family Tax Credit, which would allow taxpayers a $500 credit for non-child dependents.
Changes to Itemized Deductions
Taxpayers who itemize will now be limited to a state and local tax (income, sales, and property) deduction of a total of $10,000 each year. Taxpayers will also only be allowed to deduct mortgage interest on new debt up to $750,000 for first and second homes, down from the $1,000,000 limit today. No deduction is allowed for home equity debt. Note that for debt incurred prior to December 15, 2017, the limit remains at $1,000,000, so this provision only affects new mortgages.
Alternative Minimum Tax
Fewer individual taxpayers will be subject to the AMT going forward, as the tax bill increases exemption amounts and phase-out thresholds.
Estate and Gift Tax
The bill doubles the amount that individuals and married couples may pass to their heirs tax-free at death. In 2018, an individual may pass up to $11,200,000 in assets to their heirs tax-free, and a married couple may pass $22,400,000 to their heirs tax-free. This provision expires on December 31, 2025.
Repeal of the Individual Mandate
The bill eliminates the individual mandate that requires most Americans to carry a minimum amount of health insurance or face a tax penalty. This provision does not go into effect until January 1, 2019. Although the full effect of this repeal on the healthcare industry may still be unknown, the Congressional Budget Office predicts that as a result of the repeal approximately 13 million fewer people will have insurance coverage by 2027, and premiums for those who do have insurance will likely increase significantly.
Changes That Will Affect Businesses and Business Owners
Lowered Corporate Tax Rate
Effective January 1, 2018, the corporate tax rate is lowered to 21% from 35%. Unlike the individual provisions, this provision and the AMT provision below do not expire in 2025.
Eliminates the Corporate Alternative Minimum Tax
The corporate AMT is eliminated beginning January 1, 2018.
Changes How U.S. Multinational Corporations Are Taxed
Currently, U.S. companies owe tax on all their profits, regardless of where the income is earned. The bill proposes switching the U.S. to a territorial system, meaning that U.S. companies would not owe tax on income earned offshore. In the meantime, the bill requires companies to pay a one-time, low tax rate on existing cash held overseas (anywhere from 8-15%).
Pass-Through Entity Taxation
Currently, profits from pass-through entities such as S-corporations, LLCs, and partnerships are taxed at the owner or partner’s individual tax rate. Beginning January 1, 2018, owners or partners of a pass-through entity can claim a 20% deduction for qualified business income. This provision of the tax bill is especially complicated, and there are limits on what kinds of businesses may qualify for this deduction as well as taxable income limits that determine eligibility. This provision will expire December 31, 2025.
We’re sure that you will have many questions about how these changes will affect you personally in 2018 and going forward. As a member of your team of advisors, First Western seeks to provide a holistic and connected view to your wealth in an ever-changing financial environment. Our job is to keep your priorities and goals top of mind. As we move forward in 2018, we are committed to working with you, your CPA, and other advisors to help you navigate through the changing tax landscape.
As previously noted, the list above is not a comprehensive list of all of the upcoming changes to the tax code. Because each taxpayer’s situation is different, we would strongly advise that you contact your CPA as soon as possible to discuss how these changes will affect your individual tax situation and to discuss possible strategies to lessen the impact of the legislation in 2018 and going forward.
If you have any questions, contact Celeste Villegas, wealth planning advisor at First Western Trust, at Celeste.Villegas@myfw.com.