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Blending Life, Wealth, Work & What's Next
November 10, 2017

Tax Reform Bill Thoughts Part 1

At this point, we don’t have a final bill but Congress seems focused on getting this major overhaul of the tax code completed before year-end.  While there appears to be some simplification with the proposed changes, our tax code still remains pretty complex.  For those who live in high tax states and have high value real estate, this will not be a great deal.  While we have summarized some of the proposed changes (these are not all of them!), we realize that each tax payer will see different impacts from any changes in tax law.  In general, here is a summary of the major points that we expect to impact our clients:

  • Generally there will be fewer tax brackets than before, but if you are single with taxable income between $1MM and $1.2MM or married with taxable income between $1.2MM - $1.6MM you will be subject to an excise tax.  The brackets will be: 12%/25%/35%/39.6% and 45.6% (for those affected by the excise tax)
  • Capital gains tax rates will be similar to current rates, but slightly different due to different income tax brackets and will be at 0%/15%/18.8%/ 23.8% -- the last 2 due to the fact that the Medicare Surtax was NOT repealed with healthcare reform.
  • The Alternative Minimum Tax (AMT) is repealed and there will be an ability for the next 3 years to recapture Minimum Tax Credit (MTC) carryforwards from prior years.
  • The Standard Deduction will be doubled thus eliminating the need for itemized deductions for many people.  Each situation will be different and depend on where you live and the types of deductions that you have had in the past.
  • Personal exemptions are gone but Child Tax Credits are increased from $1000 to $1600/child and a new “Family Flexibility Credit” of $300/person living in the house such as you, spouse, elderly parents, college-age students.
  • Many deductions are reduced or eliminated:
    • State and Local Income Taxes are no longer deductible – tough for those in high income tax states.
    • Property tax deductions are still deductible but limited to houses only and $10K/year – again, tough for people in the high real estate tax states.
    • Mortgage interest on houses bought or refinanced after 11/2/17 will be limited to deducting interest on residence ONLY (not second homes) loans up to a balance of $500K.  If you refinanced or bought before 11/2/17 you will be grandfathered in.
    • Charitable deductions stand and in fact will allow cash deductions of up to 60% of Adjusted Gross Income (AGI), up from 50%.
    • Tax preparer fees are NOT deductible any longer.
    • Investment management fees ARE deductible under the 2% above AGI Miscellaneous Itemized Deduction threshold.
    • Employee unreimbursed business expenses are NO longer deductible.
    • Medical expenses deductions are GONE.  Hard for families with ongoing or costly medical expenses.
    • Plug-In-Electric tax credits are GONE - so buy the Tesla before year-end!
  • Section 121 Exclusion on Primary Residence gains will get stricter.  Instead of having to live in your residence for 2 out of the last 5 years, it will be 5 out of the last 8 years.  So, home flipping just got MUCH tougher.  The amount of the exclusion remains the same at $250K for single filer and $500K for couples.
  • 529 plans may now be used for up to $10K/year of private elementary and high school expenses.  This is HUGE.
  • There are other changes in education credits and rules about setting up 529 plans that we can address on a case-by-case basis.
  • The biggest and most controversial issue is the new 25% tax rates for business income.  Suffice it to say, each business owner will have to tackle this with their tax advisor to determine if and what they can do.
  • Roth IRA Recharacterizations are NO longer allowed.  Once you do it, it’s permanent.
  • The Gift & Estate Tax Exemption will be increased with full Estate Tax Repeal potentially by 2024.  Just an FYI that the annual gift exclusion will be $15K in 2018.  Instead of being able to shelter $5.6MM per person in 2018, it will double to $11.2MM.  For most people, this will be a moot point, and as in prior years during changes in estate tax rules…it’s better to leave the planet next year than this year.

Bottom line, for some individuals and families, there will be reduced taxes.  The reality is that tax planning has gotten harder for year-end 2017 and it will take the expertise of a skilled tax advisor to determine what you may need or want to do differently if you are impacted by the proposed changes.  The challenge is, you won’t be able to deduct the advisor’s fees, but it will still be worth it! 

We at Omega are in the middle of our annual tax planning process and will certainly try to look out for opportunities and challenges as we review your tax planning situation.  We also recommend that as we finish our review, you reach out to your tax advisor and talk about your 2017 and expected 2018 situation.

The final version of the law may be slightly different so it’s important to see what happens but plan for changes in 2018 and beyond.

Please don’t hesitate to reach out to us if you have any questions, and stay tuned for Part Two…

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