As of this writing the new tax bill hasn’t yet been signed by the President. But it already seems to have been sealed and delivered. So at the slight risk of being too fast out the gate, here is a summary of the vast new law which goes into effect on January 1, 2018 – with a special emphasis on steps you might take to save on taxes before the end of the year. The new law affects both corporations and individuals. Of note: The new corporate rates are scheduled to be permanent, but all of the individual provisions are scheduled to “sunset” after 2025.
Reduced Corporate and Pass-Through Rates
One of the main drivers of the legislation was to reduce corporate tax rates to make large US companies more competitive. Accordingly, the top corporate rate has been reduced from 35% to 21%. But small and medium size companies are generally subject to the same tax structure as large ones. So historically, many such businesses have been structured as so-called “pass-through” entities, in which they take a corporate form but are simply taxed at the individual rates of the owners. With the drastic lowering of corporate rates, these pass-through entities would be paying much higher taxes than if they were regular corporations. Therefore the legislation contains a deduction for “Qualified Business Income” for certain pass through business to attempt equalize the treatment. More on that later.
Lower Individual Rates
The new law retains seven tax brackets. But the rates are lower than under current law at each level of taxable income. (Capital gains rates will remain the same; with a zero rate at lower income brackets, a 15% rate in the middle brackets and a 20% rate in the top brackets. The 3.8% Medicare surtax will continue to apply on AGI above $200,000/$250,000.)
These are the new tax brackets:
| Rate | Individuals | Married Filing Jointly |
| 10% | Up to $9,525 | Up to $19,050 |
| 12% | $9,526 to $38,700 | $19,051 to $77,400 |
| 22% | 38,701 to $82,500 | $77,401 to $165,000 |
| 24% | $82,501 to $157,500 | $165,001 to $315,000 |
| 32% | $157,501 to $200,000 | $315,001 to $400,000 |
| 35% | $200,001 to $500,000 | $400,001 to $600,000 |
| 37% | over $500,000 | over $600,000 |
Big Changes in Standard Deduction, Itemized Deductions and Personal Exemptions
In what is probably the most important aspect for individual taxpayers, there are important changes to both the basic structure and particular details of many of the familiar deductions.
Foremost is the elimination of personal exemptions in the amount of $4,050 for each member of the household. Critically, personal exemptions could be taken regardless of whether a taxpayer itemized or took the standard deduction. (The Child Tax Credit has been expanded to make up for the loss of personal exemptions for families with children.) The standard deduction is raised from $6,500 to $12,000 for single taxpayers and from $13,000 to $24,000 for taxpayers married filing jointly.
Here are the most significant provisions with respect to itemized deductions:
- Deduction of mortgage interest for mortgages taken out after December 15, 2017 is limited to $750,000. Existing mortgages maintain the previous limit of $1,000,000. Deductibility of home equity loan interest is eliminated, unless the proceeds are used for home improvement.
- State and local tax deductions are capped at a combined $10,000 for income taxes, sales taxes and property taxes.
- The amount of charitable contributions (to public charities) which are deductible remains essentially unlimited up to the AGI limitations of 30% of AGI for property contributions and 60% of AGI for cash gifts.
- The medical expense deduction was maintained. And the AGI threshold was actually reduced from 10% of AGI back to 7.5% of AGI for 2017 and 2018.
- All the miscellaneous itemized deductions subject to a combined 2% floor (most notably tax preparation fees, investment advisory fees and expenses for the production of income) have been eliminated.
With respect to above the line deductions, deductions for student loan interest and out-of-pocket teacher expenses are maintained, while the deduction for alimony is repealed for divorces after December 31, 2018.
Potpourri
Here are brief summaries of some (but of course not all) of the other significant provisions.
- The Alternative Minimum Tax (AMT) for individual tax payers is maintained, with exemptions increased to $70,300 for single taxpayers and $109,400 for married filing jointly.
- A “Qualified Business Income” deduction of 20% is added for pass-through businesses, such as S Corps, LLC and even sole proprietorships. The deduction does not apply to the “reasonable” compensation portion of a business owner’s income, but only to the profit above that. And is phased out for AGI’s above $157,500/$315,000. This may present a good planning opportunity for small businesses.
- The Estate and Gift Tax are preserved, with the exemption doubled to $22,000,000 for married couples. But reverts back to $11,000,000 in 2026.
- Roth conversion recharacterization (which allowed a do-over if the converted amount lost value) is being eliminated.
- The Principle Residence Home Sale Exclusion is maintained at the requirement of living in the home for two out of the previous five years. There was a possibility of that being increased to five out of eight years.
- The Obamacare ACA mandate penalty for individuals to obtain health insurance is repealed.
End of Year Planning
As mentioned above, one of the biggest changes is the elimination of personal exemptions and the increase in the standard deduction. For individual taxpayers, this will present a significant challenge in the future, but presents one of the few opportunities to save if you act quickly before the end of the year.
Especially for couples, it is fairly likely that even if you have itemized your deductions in the past – the standard deduction in 2017 is $12,700 – you will be forced to take the new $24,000 standard deduction going forward. (This phenomenon is less likely to affect single taxpayers who are subject to the new $12,000 standard deduction.)
As an example, in 2017, a couple might have AGI between $100,000 and $200,000 and the following deductions: $10,000 in mortgage interest, $10,000 in state income and property taxes and $4,000 in charitable contributions; bringing their total itemized deductions to $24,000. (The new law caps state and local income and property tax deductions (SALT) at a combined $10,000 – not nearly as big a problem in a moderate tax state like Colorado as it will be in New York and California.)
On the surface, the law makes no change in the charitable contribution deduction. But in 2018, because of the increased standard deduction, the same couple would have no incentive to itemize and would lose any tax benefit from the $4,000 in charitable contributions. (Best estimates are that nationally the number of tax returns taking itemized deductions will be reduced from around 40 million to closer to 10 million. And charitable donations will be diminished by billions of dollars.)
So good strategies for year-end might be to:
- Advance the charitable contributions you were considering making next year into 2017 – in order to obtain the current tax deduction.
- Consider starting a Donor Advised Fund with one of the major brokerage firms or your local community foundation. You’ll get a deduction in the year of the gift and can dole out distributions to your favorite charities in years you can’t itemize.
- Give highly appreciated stock or mutual funds and avoid capital gains.
- If you’re over 70 ½, take advantage of the direct IRA Qualified Charitable Distribution which allows you to shunt up to $100,000 of your annual required minimum distribution to charity. Effectively providing a charitable deduction even if you don’t itemize.
- Make your 4th quarter state income tax estimate (usually payable in January) in December.
- Pay your 2017 property tax bill in December. The new law allows this, but specifically prohibits prepaying state income taxes for years beyond 2017.
Hopefully some of these suggestions apply to you and you will have the time and inclination to implement them. (0ne caveat, if you are subject to the Alternative Minimum Tax in 2017, these strategies may not work and you should run the numbers.) After the New Year, as strategies emerge for the future, we will cover those as well. Good luck and Happy New Year!
